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The Inequality Conundrum Pathways Ahead for India

The Inequality Conundrum Pathways Ahead for India




  • Executive Summary
  • Taxation and Inequalities: The Beginning
  • What is Gini Coefficient?
  • Environmental, Social and Governance Considerations
  • The Way Forward
  • Enabling Social Change and Impact
    • Make in India An Analysis
      • Enablers for foreign direct investment in manufacturing
    • Enabling Employment
    • Enabling Environmental Change and Impact
    • Enabling Fiscal Deficit
    • References
    • Annexure
Includes the Webinar 3 | Nishant Malhotra presents The Inequality Conundrum Publication | The middle Road

Executive Summary

The Inequality Conundrum Pathways Ahead for India publication is written and researched by Nishant Malhotra, Sole Founder of The middle Road platform. The publication is the same as the original report published; (The report was edited for spell checks and Grammarly content; otherwise is the same.) though dated, it is helpful to understand the underlying causes for inequalities. This read features India as an example but can explain disparities globally. Previous embedded educational videos have removed; and a new video on factors of production added. 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. The analysis looks 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. This 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 socio- economic ecosystem, policies enacted by the government including Make in India & its impact in India and recommendations ahead.

Credit Suisse 2019 World Report is an eye- opener 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 percent of the global wealthy individuals started reversing after the financial crisis, especially in America. Today, the top 1 percent of the population hold about 44 percent of the worldwide wealth of the world. In a disturbing trend, the lower half of the population own less than 1 percent of the global wealth while the wealthiest 10 percent own 82 percent of all wealth. However, the top 1 percent owned 46.9 percent of global net assets in 2000, giving clear evidence that globalization has reduced inequality to a certain extent. 1 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 percent of Indian population hold 77 percent 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 24422 billion/~$3226 billion. 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 $I million or ultra-high net worth individuals with assets above $100 million. Tax revenues as percent of GDP is one of the lowest in the world. With about 90 percent of the Indian population in unorganized sector and a 34 percent urbanization rate based on the World Bank’s data for 2018, India has a huge challenge in addressing 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 percent of the GDP, which is already 30 percent 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 till 2030. The rising environmental issues remain 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 percent of employees although its share in the GDP is only 15 percent.  About 87 percent 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 percent share in the economy employees only 20 percent of the employees, lower compared to rapidly advancing economies.  The matter is further exasperated with inability to increase the size of the manufacturing sector as a percent of GDP which remains at ~15 percent 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.


Nishant Malhotra Founder | CEO
Middle Road OPC Pvt Ltd | The middle Road


        “The avoidance of taxes is the only intellectual pursuit that carries any reward” John Keynes



# Taxation and Inequalities the Beginning

Lack of a 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 and marginalized communities. The Onset of COVID-19 has been a gamechanger 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 variable in the graph above signifies that as countries become more advanced, the tax revenue usually rises as percent of GDP keeping other factors constant. Fig a above

The world trade volume reduced by 13.32 percent 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. Apart from lack of adequate progressive tax structure, another major impediment for raising domestic revenues. In Latin America non- compliance of income tax and value-added tax reached 6.3 percent of GDP or $335 billion in 2017. C However, higher progressive personal tax rates have reduced over the years, reducing from 65 percent in 1985 to 35 percent in 2015. Over the years, based on the evidence, indirect taxes have proved to be more regressive in redistributing wealth for the public good.

Graph: Financing by Sustainable Development Report 2019


India is no exception. India’s 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 percent in 2018, World Bank. Refer Fig A. Interest payments alone in India account for 23 percent of general government revenues, the highest burden among Baa peers and inability to widen the tax base or tax revenues weighs hugely in India’s ability to manage debt in future. 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 percent of the Indians own about 45 percent 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 $100 million. Further, between 2018 and 2022    .

India produced ~ 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 percent over the last ten years 1, the top 10 percent of Indian population hold 77 percent 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 percent 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 and a bottleneck for implementing projects in critical areas of sustainable development. Furthermore, an IMF study found a gap of $2.3 trillion by 2030 based on annual funding needs of 155 developing countries in five areas i.e. education, health, roads, electricity, water and sanitation. c 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 percent from 25 percent 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 wealthy population as Indians have a penchant to buy houses as a source of investment. As the purchase of houses increases, so does the marginal tax rate as a percentage of the transaction value. The concept populates the theory that an increase in the number of houses by families reduces the marginal utility of the house, translating into reduced wellbeing, etc. Further, increasing the long-term tax rate on housing from two to four years will bring down speculative trading in the property market in India. Another policy would be an increase in the short-term capital gains tax across asset classes based on the threshold of investible surplus. For 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 or more substantial capital punishment is the more pronounced way of encouraging broader tax participation among the population. From now on, building an equitable, progressive tax system along with a structured framework on policy measures example, setting up independent jurisdiction on cases related to tax evasion resolved within a stipulated time limit, is a step in the right direction.

# 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 parallelly by the percentage of the population within society. Gini Coefficient uses the Lorentz curve to qualify a numerical value that 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. The higher the Gini Coefficient value, the higher the unequal distribution of wealth.  The index’s major challenge is the different methodologies used in calculating the measure. Income data can be both pre-tax or after-tax disposable data or based on consumption or expenditure data. The pitfalls in calculating Gini Coefficient is the lack of wages data, especially for countries like India, which struggles with tax evasion; data for disposable income seems to be a better bet assuming the payment is spread across households. International Labour Office briefing paper Inequality, income shares and poverty by Malte Luebker stress the importance of measuring the index through household income adjusted for the family size. The vertical Y-axis (next page) details the cumulative share of income which corresponds to the cumulative share of the population in percent on the horizontal axis. The line of perfect equality/distribution dissects the two at perfect 45ᵒC. The area between the perfect equality/distribution line and the Lorentz curve is A, the area under The Lorentz curve is B.

Gini Coefficient 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 these are not updated for many countries. An excellent example of a benchmark is a low inequality scenario; the bottom 50 percent of the population receives 36 percent of total incomes. In contrast, the income share is reduced to only 17 percent for a high inequality scenario.


In scenario 1 (A), 20% of the income is shared by 40% of the population. For scenario 1 the portion under the curve is A and outside B.  Gini Coefficient calculated as A/A+B.

In scenario 2, 70% of population receives 20% of the income 


# Environmental, Social and Governance

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 percent of gross domestic product increases. Europe is an excellent example. Income inequalities lead to social unrest and asymmetries within the system leading to a fall in productivity. A few asymmetries include a high proportion of employment in the unorganized sector and required contribution towards the work of some industries based on parameters, such as percentage to GDP.

Total Factor Productivity implies that both these factor inputs account towards productivity and the level of technology. Refer to the educational video on updated Factors of Production under Online Courses – Microeconomics at The middle Road. 0.7 is the share of capital in the national income, 0.3 share of labor. Production function has constant returns to scale, i.e., a 20 percent increase in both factor inputs will give a 20 percent increase in output.

Asymmetries within the economy lead to unequal allocation of resources to capital and labor driving down the productivity of an economy. As we progress, we will understand the dynamics of the labor market in India. High labor participation in the unorganized sector makes capital allocation by the government more difficult. These factors drive down the iterative marginal productivity of workers


    *Correction the graph $1=75.5 INR.


Marginal labor productivity is equal to real wages

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


Lack of supportive infrastructure drives inefficiencies within the system. The ongoing pandemic has shown global deficiencies in the healthcare system, even in advanced countries. India invests only ~3 percent of the GDP in healthcare. Refer to the side graph to compare selected developed 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 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. According to NABARD All India Rural Financial Inclusion Survey 2016-2017, about 37 percent of households have less than 0.4-hectare land. Another 30 percent of the agricultural households have land sizes ranging from 0.41 to 1 hectare. The global is 12 percent of farms which are below 2 hectares. 3 Half of India’s farmland has no irrigation, with agricultural produce highly dependent on the monsoon season. The result is little access to the latest technological advances in agriculture. Only 5.2 percent of the agricultural households in India have access to tractors, 1.8 percent to power tiler and 1.6 percent to drip irrigation. 5 Only 32.2 percent of the agricultural households are educated. The divergence in the rural wages between the agricultural vs non-agricultural sector is due to divergence in productivity. Wages keep in step with productivity, i.e., real wages are equal to the marginal product of labor. The World Bank 2018 figure for urbanization in India stood at only 34 percent less than the global average of 55.27 percent. In 1988 China’s GDP was $312.35 billion and India’s GDP $296.59 billion, and by 2019, China’s nominal GDP stood at $14.14 trillion and India’s at $3.2 trillion. One of the critical factors for China’s growth, keeping other factors constant, is the rapid urbanization rate of ~ 69 percent; 2018 figures and transformation in the agricultural sector. GDP in nominal numbers.

Webinar: Nishant Malhotra on Inequalities Publication 

# The Way Forward

Enabling Social Change and Impact



India has favourable demographics skewed towards youth, which brings a set of challenges. About 8 to 12 million young adults will join the labor force every year till 2030, emphasizing the continued application of innovation, skilling, and new job creation. However, this looks daunting looking at the inherent structural abnormalities and mindset within the Indian ecosystem. Less than 5 percent of the people in rural areas have a graduate degree, highlighting skilling and equitable quality education as the most significant enablers for social change and impact. The PPP model needs to be replicated at the local and central level, embedding it into 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 is lagging in the current Startup India plan. 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 transforms over the next decade, Care24 serves as a gateway to the nursing segment within the healthcare industry, a low-hanging fruit, for the labor force. A renewed focus must be given to foster jobs in the healthcare industry, especially for unskilled workers 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. As the economy develops, the average holding of the 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 Raneythe average farmland size decreased between 1960-2000 for lower-income and lower-middle-income countries. Still, it increased in some upper-medium countries and almost all the higher-income countries. For India to transit from lower-middle-income to upper-middle-income country over the next decade, consolidation of land ownership by farmers will prove to be a key enabler.

Policy Enablers include buying land at market-driven prices and selling in multiples of 2 hectares to remove the marginalization of farmers. Selling land at discounted rates to marginalized farmers through broadcasted auctions televised live on national channels enhances accountability. Skill development for farmers will boost alternative careers and structure national policies to make the real wages of farmers according to their productivity.


To achieve the above two key performance indicators, 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 percent and 42.8 percent 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 percent is exceedingly high.5 Microlending 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 keeping down lending rates. Kiva, a worldwide microlending pioneer, has successfully transformed this sector through innovative practices. There are two important ways in enabling sustainable change and impact within this sector. One, the government or multilateral development banks take the first loss of capital in a designated corpus of the fund and other development sector institutions. Blended Capital is increasingly deployed globally as a financial tool to reach the most vulnerable section of the society to leverage capital for better good. The other is to build a national peer 2 peer technology platform wherein all farmers can register and raise money at below-market interest rates. Finally, promote world-class microlending pioneers like Grameen Bank to replicate their success at a larger scale. The significant enabler here as a policy measure is to make an investment into development projects mandatory as part of Customer Social Responsibility guidelines. These measures reduce exploitation of rural householders by moneylenders habitual to 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 critical concern articulated by Moody’s; this measure would alleviate some systemic risks within our system.


# Make in India: An Analysis

Make in India initiative launched under the present government in 2014. The Indian government wants a dominant position in the manufacturing industry and an increase of 25 percent of GDP by 2020. The ambitious target was set through 25 sectors—side Fig b. Japan Plus and Korea Plus initiatives started to fast track investments from these countries. The aim is to create 100 million jobs in India by 2022. Ninety percent of the working population is in the unorganized sector, with a rising unskilled population; Make in India facilitates surge in employability, significantly among unskilled workers. However, the targets of the mission are unrealistic. Employment data derived from The World Bank is from International Labor 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 (percent of total population ages 15+) (modeled ILO estimate)

First, the manufacturing industry value add as a percent to GDP is 14.82 percent down – 1.6 percent since 2014. (Data: The World Bank). If you look at the side graph, the manufacturing industry value adds as a percent of GDP has hovered between 17 percent and 14 percent. According to World Economic Forum, the manufacturing value-added has increased only 7 percent over the last three decades. Second, the employment within this sector is not even close to 100 million. In the side graph, manufacturing is part of the industry sector, and its share of jobs with the economy has been reasonably constant over the years. Iterative employment within this sector might have cannibalized other sectors within the industry sector, keeping other factors consistent. 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 the Legacy group with Thailand, Mexico, Hungary, etc. There are four categories in the report as detailed in fig below. 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 the scale.



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


In the diagram below, the four quadrants depict group categorization of countries based on their shared  attributes. Top group of countries lead in complexities and scale of business and have favorable drivers of production. Countries in high potential group although low on complexities and scale of production but better equipped for future compared to legacy countries. 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 | Fig 1. 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 two essential attributes, Technology and Innovationand Human Capital, while India and Thailand are comparable in this respect. Singapore remains a powerhouse in the manufacturing industry, enabling trade and ambition among the ASEAN countries and Indonesia, one of the fastest emerging countries globally. ASEAN, a combined group of ten countries, has a GDP of $3.2 trillion in 2019, more than India or the UK. The region is fast innovating in sustainable finance, with Green Issuance doubling in 2019 to $8.1 billion ~3 percent of the global share. 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 percent of analysis for calculation for Drivers of Production, it will have more weightage going forward primarily after the pandemic.

Source: The World Bank

Sustainability will play a paramount role in deciding foreign direct investment in the future, especially in the manufacturing sector. Improvements in sustainable resources will enable more lending through sustainable finance leading to more comprehensive sources for raising capital. Refer annexure.  Under high potential countries, UAE and Qatar are two economies from Asia more ready to tide the future. Refer to the report Readiness of Future Production Report 2018. One of the critical advantages for India is the consumption-driven economy, with 65 percent of the population under the age of 35 years. India has implemented some necessary policies, including NATRiP (National Automotive Testing and R&D Infrastructure Project), to spearhead India as a global leader in automotive excellence. However, it’s a long way ahead. Despite increasing R&D spending in recent years, India spent 0.59 percent of GDP on R&D expenses in 2018, down from 0.83 percent in 2011, a 27.7 percent drop from 2011 to 2018. China spent an average of 2 percent of GDP on R&D (2011-2017), Thailand 1 percent of GDP (2017), the US 2.78 percent (2017), and France 2.18 percent (2017). Source: The World Bank.


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


It’s stunning that India’s investment in research and development as a percent of GDP has dropped by 27.7 percent (approx. fig after rounding the digit to a single integer). Over the years, private players have invested in building the R&D ecosystem in India, especially Intel’s ~145 million investment, f the largest of its kind outside the US; India is hugely underinvesting to build a world-class global manufacturing hub. Although India’s Engineering R&D (ER&D) Globalization and Services market reached $22.3 billion in 2016 and is expected to reach $100 billion by 2025, according to a report by NASSCOM and global consulting company Zinnov, it will still be only 4.5 percent of the $2.2 trillion global markets. To build a manufacturing ecosystem, India needs to increase its R&D investment as a percent of GDP to ~2 percent over the next decadeOver the following decade, it should build expertise in the renewable automotive industry heavy engineering, including shipbuilding 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 constantly needs to reform its labor laws. Based on a Deloitte Insolvency Advisory Services report, the average time to resolve an insolvency case was five years in India, with a recovery rate of 26 percent. China has a resolution time of 1.7 years with a recovery rate of 36.9 percent. For example, high-income countries in the OECD have a recovery time of 1.7 years, with a recovery rate of 73 percent. However, the Insolvency and Bankruptcy Code 2016 (IBC) is a landmark reform in this sector. IBC empowers creditors to exercise timely control of default. However, IBC has some way to go, a work in progress.

# Enablers for foreign direct investment in manufacturing

Three factors are critical for multinationals to set up manufacturing plants in foreign locations. First, a visible advantage is technical know-how that facilitates etch transfer. Second is the availability of a skilled workforce backed by an abundance of raw materials. An example of the second kind is the textile industry. Global labels can set up shop in India considering the 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. For example, a gift in manufacturing electric vehicles or autonomous vehicles. WEF rankings highlight the pitfalls for India in drivers of production. With the 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 in India. Better market access and increased accessibility to customer insights are crucial enablers for attracting FDI in India. India is one of the largest smartphone markets globally but price-sensitive, putting pressure on profit margins. 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 percent market share much higher than OPPO, which is at 12 percent. Setting up a factory in India is cost-effective for Xiaomi. Xiaomi’s demand for an 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 ($480 million) in India for capacity expansion. d 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 customize features for customers through better end-user insights for maintaining or gaining a competitive edge over the competitors. Third, India could ultimately become the global hub for manufacturing and shipping mobiles to other countries through economies of scale.

As labor costs increase in China, the country transforms itself into a world-class advanced technology hub. The Made in China 2025 is a mindboggling initiative by China to beat the middle-income trap. China is looking to build higher-value technology products with an eye on VLSI technology. So, over the next decade, there will be a systemic shift in the types of products manufactured in China as labor costs drive up the price of products. Manufacturing smartphones in China significantly at the price points sold in India will not be a priority for Chinese brands as we advance. There will be a trade-off between exiting price-sensitive smartphone segments or relocating manufacturing units to India. Due to its importance to the Chinese mobile brands, India’s market will edge out competitors or be part of multiple manufacturing destinations. Finally, FDI in smartphones facilitates tech transfer up ticking opportunities in ancillary sectors example, additive manufacturing, virtual reality, etc. As multiple competitors compete in the smartphone category in India, significant investment from one company nudges others to follow suit. As technology disrupts the future, the pathways ahead are little known. The genesis of the 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. China is a dominant country in the technology sector. Although the Indian government has quoted an exponential increase in FDI investments, these investments flow directly to various asset classes in the capital markets. Opening up direct investments in space technology is an excellent step in attracting capital in advanced technologies, especially after India’s recent success in space technology. But making realistic targets in the manufacturing sector as a percent of GDP is The middle Road for success. Make in India is a long-term strategya work in progress as it takes years to build an ecosystem supporting the making of a manufacturing hub. In a nutshell, one of India’s best bets 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 globally, second in smartphones next to China. There are various estimates for the share of smartphone users in India. techARC estimates there are 502.2 million Smartphone users as of December end 2019, with 77 percent accessing smartphones over wireless. However, this doesn’t indicate the extent of individual smartphone users due to multiple handsets owned by individuals. According to Statista, Indian smartphone users will account for 12.5 percent of the global markets in 2020, while 33.3 percent of the population in India should have a smartphone by 2021. Out of the top five smartphone brands, four are Chinese the other brand is Samsung. After Samsung inaugurated the largest manufacturing plant in India, it’s logical for Chinese companies to follow suit over the next decade. This measure will also lead to jobs for unskilled workers, shifting the labor force from the unorganized sector to the organized sector and making smartphones cheaper with more distinctive features. Over time a nudge towards peace between India and China.

# Enabling Employment


Increase employment in the services industry as percent of total employment in India. 

Finally, India needs to focus on the services industry more decisively. Services account for ~ 49 percent of GDP in India yet employ only 31.9 percent 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, taking other factors constant. As India starts to focus on product-focused startup’s, healthcare, fintech, agri-tech, online education, cyber security, space technology, cloud computing are critical sectors to increase the percent of employment as a percent of GDP to 40% within a decade. Africa is very similar to India compared to the addition of labor force over the next decade. The continent has the fastest-growing working-age population that will result in one of the largest if not the largest unemployment rates globally in the years to come.”

# Enabling Environment Change and Impact

The Cyclone Amphan caused widespread devastation in the eastern part of India, disrupting more than 50 million lives and amounting to ~13 billion 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 million by 2025 at CAGR 36.60 percent. 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 ~$492 million Research & Development centers to enable global excellence in the automotive industry. Faster Adoption and Manufacturing of Hybrid and Electric Vehicles are now in phase two to catalyze consumer interest for sustainability. These are a few reforms listed and don’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 the sale of electric vehicles in India. According to Global EV Outlook 2019 by IEA, around 45 percent of electric cars on the road in 2018 were in China, totaling 2.3 million, a jump of six percentage points from 2017. Europe’s share is 24 percent, followed by the United States (22 percent), the most dominant region and country. With carbon neutralization becoming a global priority and battery swapping technology looking to be a catalyst from now on, 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 mediocrely in Worldwide Governance Indicators, and the recent debacle of Yes Bank presents an inherent risk within India’s business ecosystem. a Although the Indian government has taken ground-breaking reforms in the labor sector, the critical problem is restructuring taxation structure and 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 can only be resolved through corporate governance laws and policies managed by an independent judiciary. Implementing 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 percent recovery bid by Arcelor Mittal).

Enabling Fiscal Deficit

Rising yields signify fall in trading price of the bonds. Refer to the Online Course on Fixed Income Securities on  The middle Road to know more. India’s total reserve tally stood at $487 billion (time of the original publication), a year of imports giving RBI a lot of flexibility to step in if the India rupee depreciates a lot. 9  The pandemic stimulus is significant for sustaining the economy, especially the marginalized population. An uptake in asset purchases can increase 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.

Non-Deliverable Forward Market

To facilitate hedging in non-convertible currencies, especially Chinese Renminbi, Indian Rupee, Korean Won non-deliverable forward exchange centers started in Hong Kong and Singapore. NDFs are virtual future and forward contracts, allowing traders to take a view on the underlying currency with settlement in the dollar. Other settlement currencies are Euro/ CHF. As a forward transaction, NDFs are selected for non-convertible currencies at a forward date herein one month for an agreed price. On the day of settlement, the spot rate is compared with the reference rate, and the difference between the two is settled between the two parties in the convertible currency.

For example, Nike has delivered shoes to India and will get paid in one month, 5 million Indian rupees. Assume the exchange rate today between 1 Dollar to INR is 75. In one month, if the Indian rupee appreciates, Nike will gain but lose if the rupee depreciates. If Nike has a view that the Indian rupee will depreciate against the dollar in one month, it will go into a contract to hedge its risk to limit the loss. A weaker rupee means fewer dollars. It will lock the trade for 5 million rupees @ 75 with another counterparty. If after one month, the dollar/rupee rate is $1=76, Nike will receive the following.

= (1/76 -1/75) INR* 50,00,000 INR


= (0.013158-0.013333) *50,00,000= – $877.19


Nike will receive $877.19 from the counterparty. If the rupee appreciates to $1=74, Nike will pay the counterparty $900.


= (1/74-1/75) INR *50,00,000 INR


= $900.9


The Indian rupee is not freely convertible in international foreign exchange markets, and the hedging exists 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 significant recommendation of The middle Road to mitigate the burden of coupon payments which amount to 23 percent of GDP. The bonds can be rolled over with fresh issuances during 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 the manufacturing and services sector as a percent of the total labor force to reduce the size of the unorganized sector and jobs in the agriculture sector. The share of the agriculture sector as a percent of GDP should fall in tandem with an increase in the share of the manufacturing sector as a percent of GDP. As recommended, one critical enabler is to increase spending on R&D as a percent GDP with a target to take it to 2 percent in the next five years. Design policies that enable innovation through FDI, tech transfer, and initiatives like Atal Tinkering Labs. The key focus must be to foster online education for less privileged people by magnifying 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 Online Macroeconomics Courses at The middle Road.


Increasing productivity through the Solow model, enabling skills sets among unskilled laborers, and growing average farmlands are progressive reforms and initiatives. The growth should not be a problem for a country of 1.3 billion, predominantly driven by consumption. The primary worry for India is that it has an attitude problem. Making physical changes are easy but changing the mindset instilled over centuries in people is highly problematic and time-consuming.



* 1 USD= 75.5 INR

Employment data derived from The World Bank 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+) (modeled ILO estimate)



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%



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