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The Inequality Conundrum Pathways Ahead for India

Executive Summary

The Inequality Conundrum Pathways Ahead for India is the third publication from Nishant Malhotra, founder of The middle Road platform. Income inequalities are the mother of all enablers of social distress, unhappiness and social inequality. A metaphor Inequality here symbolizes income and social disparities to a diverse set of mindset governing people globally. This report shares a holistic perspective on factors governing income, social and mindset inequalities in India. I take a look at the high-income disparities in India, the low taxation percentage to GDP ratio and the potential risks highlighted by Moody’s in its recent downgrade of Indian sovereign rating to the lowest investment grade. The piece is a deep dive into few underlying reasons for social and economic inequality in India, introduces the concept of Gini Coefficient, production function, non-deliverable forward market, zero-coupon bonds and much more. Learn about a few Environmental, Social and Governance considerations impacting Indian socioeconomic ecosystem, policies enacted by the government including Make in India & its impact in India and recommendations going forward.

India’s Socio-Economic ConundrumThe Credit Suisse 2019 World Report is an eyeopener for understanding income inequalities around the world. The global income inequality has come down in the last two decades with the Gini Coefficient coming down. But the trend in the top 1 per cent of the global wealthy individuals started reversing after the financial crisis, especially in America. Today, the top 1 per cent of the population hold about 44 per cent of the worldwide wealth of the world. In a disturbing trend, the lower half of the population own less than 1 per cent of the global wealth while the wealthiest 10 per cent own 82 percent of all wealth. However, the top 1 per cent owned 46.9 per cent of global net assets in 2000, giving clear evidence that globalization has reduced inequality to a certain extent. 1

Note: left axis: % share of national wealth; right Gini Coefficient

The trend in India is worrisome. Based on Credit Suisse 2019 World Report team assessment, India has one of the highest income inequalities in the world with Gini Coefficient at 0.83. The top 10 per cent of Indian population hold 77 per cent of the total national wealth based on a report published by Oxfam International. The disturbing analysis of Oxfam report is the tenfold increase in the number of billionaires in India over a decade with their combined wealth higher than the entire union budget of India for year 2018-19 which stands at INR 24422B / ~$3226B. 2  One of the key reasons for the income inequality is lack of progressive taxation for taxing higher marginal tax rates for individuals with net assets above $IM or ultra-high net worth individuals with assets above $100M. Tax revenues as percent of GDP is one of the lowest in the world. With about 90 per cent of the Indian population in unorganized sector and a 34 per cent urbanization rate based on the World Bank’s data for 2018, India has a huge challenge in addressing both socio-economic inequalities within the country.

Recent Moody’s downgrade of India’s sovereign risk to Baa3, the lowest investment grade on the back of negative outlook exemplified by the pandemic is a worry. According to Moody’s report, the economic reforms have been stalling for some time under the present Indian government with debt at 72 per cent of the GDP, which is already 30 per cent points higher than the Baa average. Financial instability due to widespread non-performing assets among the non-banking financial companies, risk of joblessness due to 8 to 12 million labor force joining very year until 2030, and rising environmental issues are some of the key concerns cited by the rating agency. The downgrade is likely to affect FDI flows over short term but India should be able to tide through the troubled waters. The publication looks at FDI sector in India with a focus on the smartphone industry.

Agriculture still accounts for 43.21 per cent of employees although its share in the GDP is only 15 per cent. About 87 per cent of the farmers are marginalized with land holding less than 1.2 hectares. This impedes their access to the latest technology available in the world as well as limiting the support from the government. Lacking economies of scale, India farmers are less productive and open to exploitation. Services which accounts ~50 per cent share in the economy employees only 20 per cent of the employees, lower compared to rapidly advancing economies including China. The matter is further exasperated with inability to increase the size of the manufacturing sector as a percent of GDP which remains at ~15 per cent missing the 25 percent target set under Make in India mission. In spite of passing Insolvency and Bankruptcy Code, 2016, India lags behind OECD countries and China in resolving insolvency cases.

The publication includes update tutorials to build up the analysis.


Nishant Malhotra

Founder | CEO

The middle Road | Middle Road OPC Pvt Ltd

# Taxation and Inequalities The Beginning

Fig A: Tax revenues as percent of GDP

Lack of progressive personal taxation with marginal tax rates covering rich and the super-rich is one of the major enablers for income inequalities within a society. These income inequalities are critical levers for social inequalities, marginalized communities. The Onset of COVID-19 has been a game changer in impacting global havoc around the globe. With no cure at present, the novel coronavirus lowered the demand and supply curve within a few months, causing monumental negative social impact through hospitalization, deaths, exponential unemployment, numerous bankruptcies and disruption. The higher income data is sued to signify that as countries become more advanced the tax revenue usually rises as per cent of GDP keeping other factors constant. In the graph above, data for Latin America & Caribbean and Indonesia is broken due to unavailability of data for some years. High Income above means high income countries.

Based on a study by United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), recurrent tax revenues contribute less than 1 per cent of gross domestic revenues for developing countries. Land leasing and non-recurrent taxes on land use and real estate especially in China have proved to be very successful for raising taxes and implementing infrastructure projects PPP projects. c

The world trade volume reduced by 13.32 per cent in 2020 according to WHO with the global manufacturing purchasing managers index (PMI) contracting to an 11-year low in April 2020. 9 Since the onset of the credit crisis, the majority of the central governments have followed loose monetary policy for enabling sustainable growth. The pandemic resulted in the most significant fiscal and monetary stimulus since the recorded history, including the Great Depression.

An IMF study found a gap of $2.3T by 2030 based on annual funding needs of 155 developing countries in five areas, i.e. education, health, roads, electricity, water and sanitation. c Apart from lack of adequate progressive tax structure, tax evasion is another major impediment for raising domestic revenues. In Latin America tax non-compliance of income tax and value-added tax reached 6.3 per cent of GDP or $335B in 2017. c Higher progressive personal tax rates have reduced over the years, reducing from 65 per cent in 1985 to 35 per cent in 2015. Over the years, based on the evidence, indirect taxes have proved to be more regressive in redistributing wealth for the public good.


(M: Millions, B: Billions, T: Trillions)

Graph: Financing by Sustainable Development Report 2019

India is no exception. India woes are amplified due to its low tax revenues as percentage of GDP. India has one of the lowest tax revenues as a percent of GDP in the world far lower than the global average of 14.9% 2018, World Bank. Refer Fig A. Interest payments alone in India account for 23% of general government revenues, the highest burden among baa peers, a and inability to widen the tax base or tax revenues weighs hugely in India’s ability to manage debt going forward. Tax avoidance has been one of the most prolific crimes in India. In a country of 1.3 billion people, only 57.8 million people filed for tax. Only 8600 Indians registered salaries above INR 5 Cr/ ~$6,62,251.7 and 2200 above INR 1Cr/~$1,32,450.33 and yet 1 per cent of the Indians own about 45% of total wealth in India. This is a stark contrast to figures mentioned in the Credit Suisse Global Wealth Report 2019. In 2019, there were 759 millionaires in India and 4460 individuals above $100M. Further, between 2018 and 2022, India is estimated to produce 70 new millionaires every day. 2 Although the Gini coefficient, an excellent measure to map inequalities in the system, has come down by 6.8 per cent over the last ten years years1, the top 10 per cent of Indian population hold 77 per cent of the total national wealth. 2 This wealth doesn’t capture the entirety of black money prevailing within the Indian system. The reliability of Gini Coefficient for India is a problem as various sources differ. Read Gini Coefficient section.

Despite rampant tax evasion within the system, the Indian government has not increased marginal tax rates for rich and ultra-rich. In India the top tax rate of 30 per cent starts at an income above INR 15,00,000/ $19867.5, considered average starting salary from a tier 1 business schools in India. Lack of higher marginal tax rates across a wider section of high-income individuals and inability to systematically weed out tax evasion are some of the most significant enablers of prevailing income inequalities within the system. Based on wide research, direct taxation is by far a better way of promoting equitable growth within the society. This is one of the thorniest issues in American politics. Most of the advanced countries in Europe employ high tax rates to tax the rich apart from wealth and estate planning tax. Increasing corporate tax rate to 30 per cent from 25 per cent is another tool with the Indian government to increase its revenue coffers. In recent years, recurrent taxes on property, taxes on net wealth, inheritance and gift tax are effective tools employed for managing equitable social public good in various economies.

INR= Indian Rupees

“Adapting an iterative increase in marginal tax on purchases of second and more homes is an efficient manner in roping in additional tax revenues.”

A progressive marginal tax rate on incremental house purchases will directly address the wealth population as Indians have a penchant to buy houses as a source of investment. As the number of houses for purchase increase, so will the marginal tax rate as a percentage of transaction value increase. The concept is derived from the theory that an increase in number of houses by families results in reducing marginal utility of the house translating into reduced wellbeing, etc. This along with increasing long-term tax rate on housing from two to four years will bring down speculative trading in property market in India. The other is to increase the short-term capital gains tax across asset classes based on the threshold of investible surplus. Example, marginal tax rates increase based on slabs with higher rates in the high net worth and ultra-high net worth segment. Introducing benefits for people to pay taxes through tax breaks or stronger capital punishment is more pronounced way in encouraging wider tax participation among the population. Going forward, building an equitable progressive tax system along with a structured framework on policy measures including setting up independent jurisdiction on cases related to tax evasion resolved within a stipulated time limit is a step in the right direction.

Understanding GDP? 

This is the second module in the Macroeconomics series and delves into Gross Domestic Product. This is an in-depth tutorial on the components of GDP, GNP, Real Vs Nominal GDP, GDP Deflator along with many examples.  In this module, I have shared key insights into the complexities involved in understanding different components of GDP, ways to measure GDP, key different measures used globally in understanding income creation within an economy. The module introduces the fundamental concept of inflation, means to understand inflation example Consumer Price Inflation, GDP Deflator among other ideas.

# What is Gini Coefficient?

Gini Coefficient is the most popular method of measuring inequality first recommended by Corrado Gini.
Lorentz Curve is the graphical representation of wealth distribution i.e. the cumulative proportion of income earned paralleled by the percentage of the population within a society. Gini Coefficient uses Lorentz curve to qualify a numerical value which ranges from 0 to 1, with 0 being the most equitable distribution of wealth and one the most unequal, i.e. one person owns all the wealth in the economy. Higher the value of the Gini Coefficient, higher the unequal distribution of wealth. The major challenge facing the index is different methodologies used in calculating the measure. Income data can be both pretax or after-tax disposable data or based on consumption or expenditure data. The pitfalls in calculating Gini Coefficient is lack of wages data especially for countries like India which struggles on tax evasion, data for disposable income seems to be a better bet assuming the income is spread across households. International Labour Office briefing paper Inequality, income shares and poverty by Malte Luebker stresses the importance of measuring the index through household income adjusted for the family size.

The vertical Y axis details cumulative share of income which corresponds to the cumulative share of the population on the horizontal axis. The line of perfect equality/distribution dissects the two at perfect 45ᵒC. The area between the of perfect equality/distribution line and Lorentz curve is A while the area under The Lorentz curve is B.

Gini Coefficient is calculated as A/A+B.  Advanced countries have lower Gini Coefficients, uniquely Nordic countries, while low-income countries have high values. This report relies on the Credit Suisse Global Wealth Report 2019 values rather than The World Bank figures as they are not updated for many countries. An excellent example of a benchmark is for low inequality scenario; the bottom 50 per cent of the population receive 36 per cent of total incomes. In contrast, in the high inequality scenario, the income share is reduced to only 17 per cent. +

# Environmental, Social and Governance Considerations

Equitable education, healthcare, transport, infrastructure, employment are very significant enablers of equitable growth and social impact. Free and quality education and healthcare are the pillars for building a developed economy. As a country transits from an emerging to a more developed economy, the public resources as a per cent of gross domestic product increases. Europe is an excellent example. Income inequalities leading to social unrest and asymmetries within the system leading to fall in productivity. A few asymmetries include high proportion of employment in unorganized sector, mismatch between the share of sectors as a per cent of to the contribution of employment within the society. GDP Above: India labor force in millions

(Employment data derived from The World Bank which are from International Labour Organization, ILOSTAT modeled ILO estimate | Industry sector consists of mining and quarrying, manufacturing, construction and public utilities (electricity, gas and water) | Labor force participation rate, total (% of total population ages 15+) 53.9 per cent 2016 (modeled ILO estimate)

Total factor productivity, implies how productive both these factor inputs are 0.7 is the share of capital in the national income while 0.3 share of labor. Production function has constant returns to scale i.e. a 20% increase in both factor inputs will give 20% increase in output. Asymmetries within the economy lead to unequal allocation of resources to capital and labor driving down productivity of an economy. As we progress, we will understand the dynamics of the labor market in India. A high labor participation in the unorganized sector makes capital allocation by the government more difficult. This drives down iterative marginal productivity of workers. Marginal labor productivity is equal to real wages which is measured in quantity produced or units of output rather than monetary value. High levels of unorganized labor as a percentage of employment sector leads to exploitation of workers by employers, loss of inclusion within the society, marginalization leading to structural inequalities. This is also one of the major contributors to loss of tax revenues for the government.

r= W/P; where
r=real wage rate,
W= Wage rate in nominal terms,
P= price level of the good or service

The Macroeconomics series at The middle Road is designed to understand the complexities of economics in the global economy. This is important to understand the social impact and development economics which forms the bedrock of evidence-based research. This is the fifth module in the series on macroeconomics and the macroeconomic series is complemented by applied macroeconomics, key concepts in economics along with a quantitative section.  This tutorial discusses the aggregate production function and productivity.

Module 5 in macroeconomics section at The middle Road discusses the Production Function and Total Factor Productivity. The concept is enunciated through real data examples of countries. Learn about Cobb-Douglas Production Function, its characteristics (Constant Returns to Scale and Diminishing Returns), Supply Shocks on the production function, Real Wage Rate and Real Rental Cost of Capital. Cobb Douglas model is discussed in detail along with two factor inputs labor and capital.  Emphasis is given to enunciate with data, examples of relative total factor productivity of countries with the United States as benchmark to understand growth in productivity over time. The data also includes over two centuries of labour productivity of UK as data shared by Bank of England. A detailed analysis on diminishing returns of factor inputs with a look at real wage rate and real rental cost of capital. Total Factor Productivity is the key to understand the productivity of two factor inputs capital and labor.Production Function is an important part of macroeconomics to understand the break up of National Income. National Income is divided into Real Labor Income and Real Capital Income. The video discusses the importance of marginal factor inputs i.e. marginal product of labor and marginal product of capital. Understanding the two gives a critical understanding of both real labor income and real capital income. A detailed look at the production function along with real life examples of supporting data.


Infrastructure remains one of India’s most significant challenges for attracting capital through FDI route and building sustainable cities. Lack of supportive infrastructure drives inefficiencies within the system and waste. The ongoing pandemic has shown global deficiencies in the healthcare system even in advanced countries. India invests only ~3 per cent of the GDP. Refer to the side graph to understand comparison with selected advanced and middle-income countries. Low healthcare spending has been a bottleneck for years. Healthcare costs push 63 million Indians into poverty at a rate of 2 per second. 2

                                                                                                                              In the graph above correction $1=75.53
                                                                  Graph Real wages in $/day Comparison Agri Vs Non Agri sector Rural India

The above graph depicts the salary comparison of workers in rural India for agri and non-agri. Women are remarkably underpaid compared to men. One reason for low wages per day for the Agri sector could be due to less productivity mainly due to small landholdings, lack of economies of scale, seasonality of crops and less bargaining power keeping other factors constant. By the law of economics, this wage arbitrage should exist until workers from the agri sector move into the non-agri industry in rural India until wage differential is due to the skill level of jobs. This is based on the fact that the educational qualifications are not very divergent so job transition can be much more accessible through vocation training for employment etc. The other is to increase the landholdings of farmers in India.

The pandemic has set the healthcare industry for major reforms which if enacted over the next few years will have a massive burden on revenues.

In this module, check out the impact of the pandemic on the factor inputs and productivity within an economy.

According to NABARD All India Rural Financial Inclusion Survey 2016-2017, about 37 per cent of households have less than 0.4-hectare land, another 30 per cent of the agricultural households have land sizes ranging from 0.41 to 1 hectare, and the remaining one-third land sizes ranging up to more than 1 hectare. This is way below the world average of 12 per cent of farms which are below 2 hectares. 3 Half of India’ farmland has no irrigation with agricultural produce highly dependent on monsoon season. a The result is little access to latest technological advances in agriculture. Only 5.2 per cent of the agricultural households in India have access to tractors, 1.8 per cent to power tiler and 1.6 per cent to drip irrigation. 5 Further 32.2 per cent of the agricultural households are educated with only 4.6 per cent with Diploma/Graduate degree and though it’s close to non-agricultural households, its highlights a systemic problem within the society. The rural wages for agricultural vs non-agricultural sector due to divergence in productivity. Wages keep in step with productivity i.e. real wages are equal to marginal product of labor. The troubling part is that the increase in wage growth is skewed towards managerial staff leading to rise in inequality of income. (Inequality in India: A review of levels and trends, Himanshu* May 2019). Refer to the Macroeconomic series of tutorials at The middle Road.

The combined effect is not only rising inequality at grassroots level in India. The World Bank 2018 figures urbanization in India at only 34 per cent less than the global average of 55.27  per cent.  In 1988 China’s GDP was $312.35B and India’s GDP $296.59B and by 2019 China’s nominal GDP stood at $14.14T and India’s at $3.2T. One of the key factors for China’s growth keeping other factors constant is rapid urbanization rate which is ~ 69 per cent, 2018 figures and transformation in the agricultural sector. GDP in nominal numbers. Small farms, illiteracy and presence of caste system are critical roadblocks for achieving higher productivity and real wage growth in the rural sector.

# The Way Forward

Enabling Social Change and Impact

First, India has favorable demographics skewed towards youth, and this brings with it a set of challenges. About 8 to 12 million young adults are expected to join labor force every year till 2030highlighting  the continued application of innovation, skilling and new job creation which looks daunting looking at the inherent structural abnormalities and mindset within the system. Less than 5 per cent of the people in rural areas have a graduate degree so skilling and equitable quality education is the most significant enabler for social change and impact. The PPP model needs to be replicated both at local and central level making it a national strategy. Atal Innovation Mission’s tinkering labs is a thoughtful initiative to imbibe a sense of responsibility and penchant for science early among children. The PPP model can be used to promote and scale this initiative. Another excellent manner to enable social innovation in the social sector through dedicated incubation centers for social entrepreneurs which is lagging in the current Startup India pathways rolled out. Utter, Care24 and UrbanClap are examples of providing value add knowledge learning opportunities to unskilled workers in the society or a platform to promote non-technical specialized skills. As the healthcare industry is projected to transform in the next decade, Care24 serves as a gateway to the nursing segment within the healthcare industry, a low hanging fruit, for the present and project labor force. Going forward, a special focus must be given by the government to foster jobs in the healthcare industry especially for unskilled labor. Looking at low density of hospitals and nursing homes in India especially in two or three tiers will enable considerable social impact within the low income community including employment.Second, as economy develops, average holding of agricultural land grows bigger.

According to the report, The Number, Size, and Distribution of Farms, Smallholder Farms, and Family Farms Worldwide by Sarah K.Lowder, Jakob Skoet, Terri Raney, the average farm land size decreased between 1960-2000 for lower income and lower middle income countries while it increased in some upper medium countries and almost all the higher income countries. As India transits from lower middle income to upper middle-income country over the next decade consolidation of land will prove to be a major enabler. One way would be for the government to buy agricultural land from the farmers at market or above market rates and allocated it at market rates (in multiples of 2-4 hectares) to foster larger Agri land holdings. The other way would be to sell back larger portion of the land to marginalized farmers at a discount to the prevailing market rates. To bring in transparency and accountability the allotment should be done through a lottery system televised live. To facilitate a smooth transition to alternative careers, the government must subside and handhold those marginalized farmers who have sold their land into alternative careers. These steps will lead to incremental holding of farmlands leading to increase in productivity and output through better application of advanced technologies and economies of scale. Increased wages, reduction of wastage and alternative careers for the most vulnerable farmers would lead to a win-win scenario for all actors within the business and social ecosystem.

Graph: Global Comparison of SECTOR-WISE percent breakup of GDP

In order to achieve the above two targets, a targeted policy to bring down the debt levels of rural households is a must. According to NABARD All India Financial Inclusion Survey (NAFIS), conducted by National Bank for Agriculture and Rural Development (NABARD), 52.5 per cent and 42.8 per cent for agricultural and non-agricultural households respectively had outstanding debt measured as Incidence of Indebtedness (IOI). The average IOI for rural households at 47.4 per cent is exceedingly high. 5 Micro lending based on PPP models with foundation and impact investors especially driving a peer 2 peer platform for farmers in India to raise capital is an excellent manner of driving down lending rates. Kiva, a worldwide micro-lending pioneer has successfully transformed this sector through its innovative practices. There are two essential ways in enabling sustainable change and impact within this sector.

Under the present Indian government, the world’s largest financial inclusion initiative was launched under Pradhan Mantri Jan-Dhan Yojana (PMJDY).  The mission of the government initiative to bring all unbanked population in India i.e. rural and urban under universal banking services starting with basic savings bank account. Until 03/06/2020, 390.4 million beneficiaries have benefited from the scheme with 292.7 million Rupay debit cards. The policy initiative enabled new deposit flows amounting to INR 131339.59 Cr ~ $17.4B.

One, the government or multilateral development banks takes the first loss of capital in a designated corpus of fund along with other actors in the development sector. Blended capital is increasingly deployed globally as a financial tool to reach the most vulnerable section of the less privileged society to leverage capital for social good. The other, to build a national peer 2 peer technology platform wherein all farmers can register and raise capital at below market level rates. Finally, promote world class micro-lending pioneers like Grameen Bank to replicate their success at a larger scale. The significant enabler here as policy measure to make investment into these projects mandatory as part of Customer Social Responsibility guidelines. These measures would greatly reduce exploitation of rural householders by moneylenders who charge astronomical rates, open stakeholders from India and abroad to promote social good at iterative multiple levels of capital and substitute NBFCs in the rural section making the NPA’s headache redundant. Non-performing assets (NPA) within the financial sector are a key concern articulated by Moody’s and this measure would enable alleviating some systemic risks within our system.

Make in India: An Analysis

The Make in India initiative was launched under the present government in 2014. The Indian government wanted to take a dominant position in the manufacturing industry and increase contribution of manufacturing to 25 per cent of GDP by 2020. This ambitious target was set through 25 sectors. Side Fig b. Japan Plus and Korea Plus initiatives were started to fast track investments from these countries. The aim is to create 100 million jobs by 2022. With 90 per cent of the working population within the unorganized sector backed by a rising unskilled population, Make in India is an excellent step in enabling employment especially among unskilled workers.However, the targets of the mission are unrealistic.

First, the manufacturing industry value add as per cent to GDP is 14.82 per cent down -1.6 per cent since 2014. (Data: The World Bank). If you look at the side graph, the manufacturing industry value add as per cent of GDP has hovered between 17 per cent and 14 per cent. According to World Economic Forum, the manufacturing value add has increased only 7 per cent over the last three decades. Second, the employment within this sector is not even close to 100 million. In the graph above, the manufacturing is part of industry sector and its share of employment with the economy is fairly constant over the years.

Graph above: Manufacturing refers to industries belonging to ISIC divisions 15-37. Value added is the net output of a sector after adding up all outputs and subtracting intermediate inputs. It is calculated without making deductions for depreciation of fabricated assets or depletion and degradation of natural resources. The origin of value added is determined by the International Standard Industrial Classification (ISIC), revision 3. Note: For VAB countries, gross value added at factor cost is used as the denominator. The World Bank

In the right side graph, manufacturing value add as a per cent of GDP in India has declined in the recent years signifies a reduction in the value added by manufacturing to the GDP in India. An iterative employment within this sector might have cannibalized other sectors within the industry sector keeping other factors constant but this seems unlikely. Actual figures of total employment generated by the Make in India initiative is not available while publishing this report.

World Economic Forum’s Readiness for The Future Production Report 2018 ranked India 30th in the global manufacturing index under structure of production criteria. India is placed in Legacy group along with Thailand, Mexico, Hungary etc. There are four categories in the report as detailed below in fig 1. The countries were evaluated on two parameters i.e. Structures of Production and Drivers of Production. Structures of Production gave prominence to complexity and scale while Drivers of Production to enablers like technology & innovation, human capital, sustainable resources among others. India stood 30th in structures of production and 44th in drivers of production. India’s performance in technology & innovation was at 34th position but ranked 96th in sustainable resources. Japan topped Structures of Production while the US ranked first in the Drivers of Production criteria. China ranked high on both the parameters and stood at 25th position on attributes like technology & innovation while ranked first on scale.   In the diagram below, the four quadrants depict group categorization of countries based on their shared attributes. Leading group of countries lead in complexities and scale of business and have favorable drivers of production. Countries in high potential group although are low on complexities and scale of production but better equipped for future compared to legacy countries.

Graph Source: World Economic Forum’s Readiness for The Future Production Report 2018, AT Kearney

Leading countries include advanced countries (Nordics, France, Switzerland, Japan and United Kingdom etc.) along with China, Malaysia to name a few. Legacy countries include Thailand, India, Mexico, Hungary, Philippines etc. Example, both Thailand and Malaysia are better equipped than in India in many attributes including complexities and scale (Structure of Production) while Philippines leads in complexity but just two places down from India in scale.

From WEF FOP Readiness Report, AT Kearney
Country Archetypes: WEF
Note: Average performance of the top 75 countries (weighted average driver score, weighted average structure score) is at the intersection of the four quadrants to create the archetype borders.

Malaysia leads India in both in two essential attributes Technology and Innovation and Human Capital, while India and Thailand are comparable in this respect. Singapore remains a powerhouse in manufacturing industry, enabling trade and industry among the ASEAN countries along with Indonesia, one of the fastest emerging countries in the world. ASEAN, combined group of ten countries has a GDP of $3.2T in 2019, more than India or UK. The region is fast innovating in sustainable finance with Green Issuance doubling in 2019 at $8.1B ~3 per cent of global share. e

China is the top global powerhouse with 28 per cent of global manufacturing output in 2018 amounting to $4T in total value added by the sector. US, Japan, Germany, South Korea and India rank respectively after China. India has 3 per cent of the global share, coming down from the 5th position in 2016. UN Statistics Department

Among the countries covered here refer to annexure, India scores the lowest on the attribute of sustainable resources. Although the sustainable resources account for only 5 per cent of analysis for calculation for Drivers of Production, it will have more weight-age going forward primarily after the pandemic. Sustainability will play a paramount role in deciding foreign direct investment in future, especially in the manufacturing sector. Improvements in sustainable resources will enable more lending through sustainable finance leading to wider avenues of raising capital. Refer annexure. Under high potential countries UAE and Qatar are two economies from Asia more ready to tide the future.

Side graph: Comparison of selected countries across selected attributes for ranking by WEF, AT Kearney report.

Refer to the report Readiness of Future Production Report 2018.

One of the key advantages for India is the consumption driven economy with 65 per cent of the population under the age of 35 years. India has implemented some key policies including NATRiP (National Automotive Testing and R&D Infrastructure Project) for making India a global leader in automotive excellence, however it’s a long way ahead. In spite of increasing R&D spending in recent years, India spent 0.59 per cent of GDP on R&D expenses in 2018 down from 0.83 per cent in 2011, a 27.7 per cent drop from 2011 to 2018. China spent an average of 2 per cent of GDP on R&D (2011-2017), Thailand 1 per cent of GDP (2017), US 2.78 per cent (2017) and France 2.18 percent (2017). Higher R&D expenditure leads to more innovation within the economy along with more captive investments in manufacturing sector.

Graph Comparison of R&D expenditure as a per cent of GDP for selected countries

“Rome was not built in one day neither was Rafale fighter jet”

India’s investment in research and development as a per cent of GDP has dropped by 27.7 per cent (approx. fig after rounding the digit to a single digit) is insightful and troubling. Over the years, private players have invested in building the R&D ecosystem in India including, Intel’s ~145M investment, f the largest of its kind outside the US, India is hugely under investing to build a world class global manufacturing hub. Although India’s Engineering R&D (ER&D) Globalization and Services market reached $22.3B in 2016, and expected to reach $100B by 2025 according to a report by NASSCOM and global consulting company Zinnov, it will still be only 4.5 per cent of the $2.2T global market. To build a manufacturing ecosystem, India needs to increase its R&D investment as percent of GDP to ~2 per cent over the next decade. It should over the next decade build expertise in renewable automotive industry, heavy engineering including ship building, space exploration. Intel investment in India should lead to a tech transfer to build a sustainable platform for VLSI technology.
To build a manufacturing powerhouse, India needs to constantly reform its labor laws. According to a report by Deloitte Insolvency Advisory Services, the average to resolve a bankruptcy case was 5 years in India with a recovery rate of 26 per cent compared to China which has a resolution time of 1.7 years with a recovery rate of 36.9 percent. High income countries example OECD have recovery time of 1.7 years with a recovery rate of 73 per cent. However, the Insolvency and Bankruptcy Code 2016 IBC are a landmark reform in this sector. IBC empowered creditors to exercise timely control of default. However, still IBC has some way to go and it’s a work in progress. It takes a time to create an ecosystem.

Enablers for foreign direct investment in manufacturing


Graph: Comparison of various smartphone brands in India by per cent market share

There are three factors very important for multinationals to set up manufacturing plants in foreign locations. First, a visible advantage in technical know-how which facilitates etch transfer. Second, availability of skilled work force backed by abundance of raw materials. Example of the second kind is textile industry. Global labels can set up shop in India considering availability of world class fabrics through brands like Arvind Mills. In the first aspect, India still does not have a clear visible competitive advantage over its peers. Example, manufacturing electric vehicles or autonomous vehicles. WEF rankings clearly highlight the pitfalls for India in drivers of production. With sustainability of exponential importance, India needs to improve its scorecard on sustainable resources. However, India can promote a third competitive advantage i.e. market entry to India, a distinct advantage for multinational brands present in India. Better access to market and increased accessibility to customer insights is the key enabler for attracting FDI in India. India is one of the largest smartphone markets in the world predominantly a price sensitive market. Xiaomi and OPPO combined have sold more than 100 million smartphones in India. Xiaomi is the number 1 smartphone brand in India with a 30 per cent market share compared to OPPO with 12 per cent. To set up a factory makes immense for Xiaomi. Xiaomi demand for NBFC license is stalled due to hostile relations between the two countries. 7 Last year Vivo announced its plan to invest INR 3,500 crore ($480M) in India for capacity expansion. d Barring hostilities between India and China, Chinese smartphone companies investing and setting up manufacturing plants is one of the best ways in attracting FDI in the manufacturing sector.

The manufacturing units will give a decisive edge to the companies in keeping costs low due to synergies in the supply chain. Second, it will help the China smartphone companies to customize features for customers through better end user insights for maintaining or gaining a competitive edge over the competitors. Third, through economies of scale India could become ultimately the global hub for manufacturing and shipping mobiles to other countries.As labor costs increase in China, the country is transforming itself into a world-class advanced technology hub. The Made in China 2025 is a mind-boggling initiative by China to beat the middle-income trap. With eye on VLSI technology among other technologies, China is looking to build higher value technology products. So, over the next decade there will be a systemic shift in the types of products manufactured in China as labor costs drive up price of products. Manufacturing smartphones in China especially at the price points sold in India will not be a given priority for Chinese brands going forward. There will be a trade-off between exiting price sensitive smartphone segments or relocating manufacturing units to India. India due to its importance to the Chinese brands will edge out competitors or be part of multiple manufacturing destinations.Finally, FDI in smartphones will enable tech transfer leading to opportunities in ancillary sectors including additive manufacturing, virtual realities among others. As multiple competitors compete in the smartphone category in India, a major investment from one company will be a nudge for others to follow suit. Samsung is a good example in this regard. As the technology disrupts the future, the pathways ahead are little known. As genesis of human race happened through the infinite permutation and combinations within the primordial soup, during the early stage of the Universe, the future of the next wave in smartphones could happen in India by the Chinese companies. Chinese in many ways will define along select few countries, the future in technology and for a very long time.

Although the Indian government has quoted an exponential increase in FDI investments, these investments flow directly to various asset classes in the capital markets being the actual investment in manufacturing sector. Recent, opening up direct investments in space technology is an excellent step in attracting capital in advance technologies especially after India’s recent success in space technology. But making realistic targets in manufacturing sector as a per cent of GDP is The middle Road for success. Make in India is a long-term strategy, a work in progress as it takes years to build an ecosystem supporting the making of a manufacturing hub. China invested between $2 to $3T in developing and upgrading its manufacturing setup during the last decade. (Citation needed. I read this figure while I was returning to India from the US in 2018. I took a flight via Beijing).

In a nutshell one of the India’s best bet in attracting capital in R&D in India is in the smartphone sector. This year India took over the US to become the second largest market in the world second in smartphones next to China. There are various estimates for share of smartphone users in India. techARC estimates there are 502.2 million Smartphone users as of December end 2019 with 77 per cent accessing smartphones over wireless. However, this doesn’t clearly indicate the extent of individuals smartphone users due to multiple handsets owned by individuals. According to Statista, Indian smartphone users will account for 12.5 per cent of the global markets in 2020, while 33.3 per cent of the population in India should have a smartphone by 2021. Out of top five smartphone brands, four are Chinese apart from Samsung. After Samsung inaugurated the largest manufacturing plant in India, its logical from Chinese companies to follow suit over the next decade. This will also lead to jobs for unskilled workers, shifting labor force from unorganized sector to organized sector and make smartphones cheaper with more distinctive features. Over time this should turn to be a nudge towards peace between India and China.

Enabling Employment

Increase employment in the services industry as per cent of total employment in India

Graph comparison of employment in services as per cent of total employment in the economy

Finally, India needs to focus on the services industry in a more decisive manner. Services account ~ 49 per cent of GDP in India but employees only 31.9 per cent of employees. The graph above clearly highlights a positive correlation between advancement in economics (GDP per capital as one of the parameters) to share of services as percent of total employment keeping other factors constant. As India starts to focus on product focused startups, healthcare, fintech, agri-tech, online education, cyber security, space technology, cloud computing are critical sectors to focus to increase percent of employment as a percent of GDP to 40% within a decade.

“Africa is very similar to India in comparison of addition of labor force over the next decade. The continent has the fastest growing working-age population which will result in one of the largest if not the largest unemployment rates globally in the years to come.”

Enabling Environmental Change and Impact

The recent Cyclone Amphan caused widespread devastation in the eastern part of India, disrupting more than 50 million lives and amounting to ~13B in economic damage. These factors along with waste management and pollution weigh critically on India’s ability to attract capital. To circumvent pollution, Indian government plans to increase electric vehicles market from 3.15 million units in 2019 to 12.03 M by 2025 at CAGR 36.60%. To promote public private partnership within the renewable sector, India envisions to take leadership position by 2030 in shared mobility for electric and autonomous cars.

Under the NATRiP (National Automotive Testing and R&D Infrastructure Project), India is setting up ~$492M Research & Development centers to enable global excellence in the automotive industry. Faster Adoption and Manufacturing of Hybrid and Electric Vehicles are now in phase 2 to catalyze consumer interest for sustainability. These are few reforms listed and doesn’t cover the range of initiatives with the renewable ecosystem, including those in the solar sector. These are long captive steps, and India is still a long way from making electric cars as mainstream compared to countries and regions like the US, Europe and China. Further, the policy initiatives have not been very successful in fostering sale of electric vehicles in India. According to Global EV Outlook 2019 by IEA, around 45% of electric cars on the road in 2018 were in China, totaling to 2.3 million jumping six percentage points from 2017. Europe with 24% followed by United States at 22% remain the most dominant regions and countries respectively. With carbon neutralization becoming a global priority, and battery swapping technology looking to be a catalyst going forward, India is still miles behind the curve highlighting inequalities in mindset among Indians compared to peers.

Enabling Judicious Governance

Governance is a persistent concern in India despite India notching up places in Ease of Doing business. India ranks mediocre in Worldwide Governance Indicators, and the recent debacle of Yes Bank presents an inherent risk within India’s business ecosystem. a Although there have groundbreaking reforms taken lately by the Indian government in labour sector, the critical problem is the restructuring of taxation structure along with reforming the systemic credit risk within the financial system. Governance issues are systemic with corruption rampant exemplified in the recent Yes Bank debacle. A deep-rooted problem, it can only be resolved through corporate governance laws and policies, managed by an independent judiciary. The implementation of The Insolvency and Bankruptcy Code legislation, signifies it will take time before India builds a sophisticated bankruptcy system. (Refer Speeding of Bankruptcy Reform in India, Suharsh Sinha, Creation of Zombie companies, SBI sale of Essar Steel in Indian Market despite 85 per cent recovery bid by Arcelor Mittal).

Enabling Fiscal Deficit

Graph: Yield of a 10 Year Bind, Source:

The 10 year sovereign bonds are the most liquid in a country and an excellent indicator of the risk appetite in a country. Current yield is annual coupon interest divided by price of the bond.  This is the most simple type of yield calculation. Yield is the interest rate which will equate the present value of the cash flows from the investment to the cost or price of the investment.  Increased investment leads to higher prices of bonds leading to lower yield values, shows resilience of investors or investor confidence as government goes ahead with more asset purchases to fund the stimulus.

In module 3C National Income Loanable Funds for a closed economy, I explained how changes in  public savings is used to change the savings supply curve which is fixed.  The total loanable fund is equal to the savings within an economy.

In the formula, S=Savings, Y=GDP, T=Taxes, C= Consumption and G= Government Purchases, I= Investment.

Y-T-C = Private Savings and T-G = Public Savings

Savings is  a sum of both public and private savings. In a closed economy, the only way to manage fiscal policy is through tinkering with tax and government purchases. However, in an open economy, in the market for loanable funds model, S=I+CF where CF= Net Outflow.

S-I= NX where NX is net exports and a function of real interest rates. Therefore, CF=NX


India is using both monetary and fiscal policy to manage the pandemic stimulus. Fiscal stimulus has resulted in increased government purchases, leading to a lowering of public saving and rise in real interest rates. Gong forward, inflation in India will be a concern limiting government’s ability to rely on asset purchases as a mode of financing the growing fiscal deficit. Sooner or later Indian government will have to increase tax rate to match its increase in government purchases.  This will help to balance the reduction in savings.

The pandemic economic loss is colossal. The world trade volume reduced by 13.32 per cent in 2020 according to WHO with the global manufacturing purchasing managers index (PMI) contracting to an 11-year low in April 2020. 9
India’s both exports (60.3 per cent) and imports (58.6 per cent) contracted in April bringing trade deficit to $6.8B, the lowest since June 2016. India’s foreign reserves have increased by $9.2B taking the total reserve’s tally to $487B, a year of imports giving RBI lot of flexibility to step in if the India rupee depreciates a lot. 9 Moody’s projects India deficit to rise to 84 per cent over the next year due to the pandemic stimulus. The pandemic stimulus is significant for sustaining the economy, especially the marginalized population. Uptake in asset purchases can lead to an increase in inflation, refer to the quantity theory of money tutorial at The middle Road. RBI has historically managed to borrow adequately, primarily through long term loans and will use a mix of long term and short-term funding for the stimulus. The foreign borrowing in the market will be moderate, especially in the short term due to risks perceived due to currency depreciation and premium for currency hedging.

Indian rupee is not freely convertible in international foreign exchange markets and the hedging exists for the market through the non-deliverable forward market. The Indian government has not issued zero-coupon bonds after 1996 with 10 to 15-year tenure. Issuing long term zero coupons to fund the fiscal depict is a major recommendation of The middle Road to mitigate the burden of coupon payments which amount to 23 per cent of GDP. These bonds can be rolled over with fresh issuance during the time of redemption.

India needs to devise structural reforms by increasing the tax revenues through higher marginal tax rates for the rich and super-rich and structure a framework of mechanism to apprehend tax evasion. India must increase employment in both the manufacturing and services sector as a per cent of total labor force to reduce the size of the unorganized sector and employment in the agriculture sector.

The share of agriculture sector as a per cent of GDP should fall in tandem with an increase in the share of the manufacturing sector as per cent of GDP. One critical enabler as recommended is to increase spending on R&D as a per cent GDP with a target to take it to 2 per cent in five years, enable innovation through FDI, tech transfer and early on initiatives like Atal tinkering labs. Foster online education for less privileged people through enabling the social entrepreneurship ecosystem in India. At a macroeconomic level, focus on supply-side economics (Solow model) through increased allocation to capital as factor input to match the growing labor supply. Check out the tutorial on production function under Macroeconomics for Social Good at The middle Road.

Increasing productivity through the Solow model, enabling skills sets among the unskilled labour, increasing average farmlands are progressive reforms and initiatives. Moody’s highlighted concerns are going forward of growing at 10 per cent nominal GDP. The growth should not be a problem for a country of 1.3 billion predominantly driven by consumption. The major worry for India is that it has an attitude problem. Making physical changes are easy but changing the mindset instilled over centuries in people highly problematic and time-consuming.




* 1 USD= 75.5 INR

Employment data derived from The World Bank is from International Labour Organization, ILOSTAT modeled ILO estimate | Industry sector consists of mining and quarrying, manufacturing, construction and public utilities (electricity, gas and water) | Labor force participation rate, total (% of total population ages 15+) (modeled ILO estimate)

a Moody’s downgrades India’s ratings to Baa3, maintains negative outlook
c Financing by Sustainable Development Report 2019
e. ASEAN Green Finance State of the Market 2019

1. Credit Suisse World Wealth Report 2019
2. India extreme inequality numbers
+ Inequality, income shares and poverty by Malte Luebker

The Number, Size, and Distribution of Farms, Smallholder Farms, and Family Farms Worldwide by Sarah K.Lowder, Jakob Skoet, Terri Raney
Inequality in India: A review of levels and trends, Himanshu* May 2019
NABARD All India Financial Inclusion Survey (NAFIS), conducted by National Bank for Agriculture and Rural Development (NABARD)
World Bank/Data
Speeding of Bankruptcy Reform in India
Deloitte Insolvency Advisory Services
World Economic Forum’s Readiness for The Future Production Report 2018 AT Kearney

(M: Millions, B: Billions, T: Trillions)


For full details refer to the World Economic Forum’s Readiness for The Future Production Report 2018; AT Kearney

Drivers of production are Technology & Innovation (20%), Human Capital 20% Global Trade & Investment 20% Institutional Framework 20% Demand Environment 15% Sustainable Resources 5%, Structure of Production Weights, Complexity 60%, Scale 40%


Suggested reading from The middle Road


Module 3A: Macroeconomics: National Income & Savings

Module 2: Macroeconomics: Learn about GDP

Module 4A Short Run, Long Run, Money, Inflation & Interest Rates

Sustainable Finance/ Sustainable Investing/ ESG Overview

Understanding Impact of Excise Tax on demand and supply equilibrium with an example of negative externalities


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