India-Pakistan Relations: Everything Old is New Again

Midnight’s Furies, Nisid Hajari’s new book about the violent division of the British Raj in India, has garnered much praise for its focus on how the decisions taken by Mohammad Ali Jinnah and Jawaharlal Nehru in the 1946-1948 period embittered India-Pakistan relations right from the very start.  But one of the volume’s under-noticed contributions is highlighting how bilateral security issues with plenty of modern-day resonance were also present in spades at the creation.

Read the rest of the essay on Asia Sentinel‘s website.

One of the issues I examine in the essay is the peril of catalytic war — that is, the danger of freebooting non-state groups mounting operations aimed at provoking inadvertent conflict between New Delhi and Islamabad as a way of advancing their own interests.  I argued in a post last month that a number of militant attacks illustrate this menace, and the Indian government seems to be believe that this week’s terrorist attack in Gurdaspur in the Indian state of Punjab may yet another example.

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Will the Real Indian Consumer Please Stand Up?

Getting an accurate handle on socio-economic conditions inside India and their implications for aggregate consumer behavior is a difficult task, as a slew of reports issued over the past few weeks demonstrate.

Two of these reports delivered sober wake-up calls for government policymakers and business executives alike.  The Indian government released data providing the first detailed look at the country’s socio-economic makeup in decadesThe findings show that the rural population, which constitutes much of the overall Indian population, is poorer than expected.  Specifically, half of the rural population lacks regular sources of income, does not own any farm land, and survives mainly from casual manual labor.  In aggregate, 70 percent of rural households survive on less than US $4 a day.  And according to a media report, data that has not yet been unleashed shows a third of urban households live beneath the poverty line.

The second wake-up call came via a Pew Research Center analysis about the global middle class.  It concludes that while India was successful in slashing the poverty rate in the 2001-2011 period, there was little resulting growth in the ranks of the middle class.  The share of the low-income population (defined as living on US $2-10 per day) increased significantly – from 63 percent of the overall population in 2001 to 77 percent in 2011, but the share of the middle class (defined as living on US $10-$20 per day) rose much more slowly – from 1 to just 3 percent in the same period.  In contrast, the share of Chinese who are middle class jumped from 3 percent to 18 percent in that time frame.

The report notes that there is no burgeoning middle class in India as is commonly made out and that a vast number of Indians are “still a ways from the transition to middle-income status.”  It chalks up these findings to the lack of deep and far-reaching economic reforms in the country.


But the research gurus also delivered good, if contradictory, news.  A report by the India unit of Fitch Ratings offers a dynamic and optimistic portrait of the rural economy.  As it sees things, the decline in the share of farm-generated income in the rural economy has been driven by the growth of the industrial and service sectors in non-urban areas over the last decade, resulting in a number of beneficial outcomes:

  • The rural economy is now less dependent upon the vicissitudes of the annual monsoon season
  • The rural economy’s share in overall GDP has rebounded from its decades-long decline and now constitutes well over half of national GDP.
  • Rural consumer spending on discretionary items has risen markedly.

Tata Motors, part of the iconic Tata conglomerate, is convinced that the rural economy holds the keys to the future.  It plans to open more than 1,000 new car outlets over the next four years in smaller cities and towns, and expects the rural market will grow faster than the urban one in the future.  Its latest annual report states:

Growing wealth in the rural markets of India also provides an added opportunity to expand sales reach and volumes. Sales from areas that were earlier considered rural are growing year-on-year and the overall gap of automobile purchase between rural and urban areas is narrowing.

Snapdeal, one of India’s largest online marketplaces, is also thinking along similar lines.  It has plans to install e-commerce kiosks in thousands of rural areas by the end of the year and is assessing other opportunities for tapping into the rural market.

An Economist Intelligence Unit study estimates that overall consumer spending in India will increase from US $1 trillion in 2013-14 to US $2.4 trillion in 2018-19.  It reports that “the rapid growth in personal incomes combined with a more open domestic market will make India an increasingly attractive market for foreign companies.”  It adds, however, that even middle-class households will continue to have sharp limits in disposable income.  “Higher-quality products certainly appeal to the country’s consumers, but price remains the main determinant of the level of demand.”

On a related note, a recent piece about how Amazon missed out on China but now sees India as its next big opportunity, quotes a Morningstar analyst as saying:

India represents a potentially lucrative consumer-spending market. India’s population could surpass China within the next 10 years, and urbanization and wage rate trends suggest a long consumer spending tailwind.

Wealth-X, a consultancy focused on the ultra rich, reports that the rise in Indian wealth creation has been particularly impressive over the past year, with the number of millionaires jumping 27 percent.  Accompanying this was an equally substantial increase in luxury consumption.  It forecasts that India will continue to generate new millionaires at a rapid pace, a development it attributes to rising levels of education and entrepreneurship.  The report concludes:

[India] has a young, well-educated population with high levels of entrepreneurship and business ownership, underpinned by a well-developed legal system. As such, wealth creation opportunities will be great, with a comparatively benign macro environment.

A study commissioned by Visa spotlights the growing affluence among India’s youthful population.  It pegs the average annual household income of the country’s affluent consumers at 1.5 million rupees, or approximately US $24,000, with an average age of 34 years, younger than their peers in most Asia Pacific markets.  It states that a strong majority of these are optimistic about the country’s economic prospects.

Underscoring the point is this media report on how young entrepreneurs are flocking to India’s first luxury goods mall located in South Delhi.  It quotes the mall’s vice president as saying:

There is a lot more new money because a lot more people are self employed, even the women are employed and you find that the pay packages are so much better, there is a lot more disposable income.


Confused by the conflicting data?  The World Bank offers some perspective, noting that while per-capita income in India rose nearly 10 percent in 2014, the country nonetheless ranks a dismal 169th in terms of per-capita income levels in the world.

This analysis is cross-posted on the website of Geoskope, a business intelligence firm focused on key emerging markets, where I served as chief knowledge officer.

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Connecting the Dots in India’s Business Portrait

The notes and observations below about India’s business climate are cross-posted at the website of Geoskope (, an intelligence company focused on key emerging markets, where I serve as Chief Knowledge Officer.

The following media items caught my attention this week, since they underscore two of Geoskope’s core messages about India: 1.) The country is a exasperating place to do business but also a potentially rewarding one if you are prepared to put in the effort; and 2.) There’s no substitute for getting out and seeing what is happening on the ground in India.

The first truth was expressed in an article in the New Delhi-based Business Standard about the lessons expatriate managers have garnered from their time in India.  It quoted the president of Panasonic India as saying, “One of the things that I have learnt while working in India is the virtue of being patient and having a sense of humility.”  An executive at the Indian subsidiary of Altran, the French technology consulting company, added that though the challenges are bigger than in Europe so are the opportunities: “You always have this feeling that everything is possible.”

Toronto’s Globe and Mail carried a good overview of the export opportunities for Canadian businesses in India.  Among other things, it stressed that patience and persistence were needed in order to capitalize on them.  It quoted the CEO of a Canadian software provider as saying that success requires a long-term commitment and that “Companies have to think in terms of years, not quarters.”

Part of the reason for this, according to Export Development Canada’s chief representative in India, is that the country has a “family-oriented” culture which places high value on personal relationships.  As a result, foreign companies have to spend time in the country to show local players they’re serious, all the more so now that India has once again become an emerging market darling.  The representative emphasized that “This is a hot market and Indian companies have lots of choice.  They are not going to answer your emails.  They are going to want to meet with you three or four times through the year.”

Reinforcing this last point, the Business Standard has a good article about the continuing prominence of family-run companies in India.


New Delhi’s municipal government reports that per capita income in India’s capital rose 13.5 percent in the April 2014 – March 2015 period and that income levels there are three times higher than the national level.  Economic data issued by Indian government agencies are a bit suspect these days.  But the figures about New Delhi jibe with new projections by Oxford Economics.  According to the consultancy, Delhi will be the fastest-growing urban economy in Asia over the next five years and that overall five Indian cities will occupy places in the top six of the rankings.  All the more reason to focus on the Indian marketplace despite its many challenges.


The importance of regional differentiation is another core Geoskope theme when it comes to the vast and variegated Indian marketplace.  Hindustan Unilever, the country’s largest fast-moving consumer goods company, has underscored this point by adopting a new strategy aimed at “serving many Indias.”  The approach segments the domestic market into 14 consumer clusters.

On a related note, McKinsey last year issued a good report on “Understanding India’s Economic Geography.”


Speaking of the sensitivity to on-the-ground conditions in IndiaA Financial Times article about how transplanted Western business models have not fared well in the Indian ecommerce sector quoted Shailendra Singh, India managing director for US-based venture group Sequoia, as saying:

In India, clone businesses tend not to work well. What India needs are mutants, meaning businesses with the same underlying DNA as those that have worked elsewhere but which come with extra powers and abilities, or entirely new species suited to local conditions.


Acquiring land in an efficient manner and at a reasonable cost has long been a huge challenge for many foreign companies with India ambitions, as IKEA’s on-going experience demonstrates.  A Forbes article on the problems dogging the Swedish retailer’s big plans for the Indian market quotes an executive: “Buying land has proved to be more difficult than we initially predicted…” The company has been forced to bring on more people in order to focus on complex real estate issues.  As things stand, IKEA believes it will take another two years before it can open its first store in the country.

Reform of the land acquisition process is key to Prime Minister Narendra Modi’s grand plans to resolve India’s vast infrastructure challenges and make the country into a global manufacturing powerhouse.  But his land reform legislation has stalled in parliament and in a recent media interview he seemed to signal he was done expending political capital on the issue: “This is not a matter of life or death for me. And neither was it the agenda of my party or the government. The initiative was in response to a demand from the states, and being a federal structure it was my duty to respond.”


Another bane to Modi’s “Make in India” manufacturing initiative is New Delhi’s infamous red tape.  For years, surveys of business people rated India as having the worst bureaucracy in Asia and the World Bank’s Ease of Doing Business index ranked India this year at 142 out of 189 countries.  (For a more amusing perspective, see here.)  Modi has taken some steps to improve things and says he wants to do more.  But then the Indian commerce minister reports that 25 government ministries have their hands in “Make in India” policymaking.  Good luck with that.


Speaking of choking red tape….

India is in a start-up frenzy.  Innovation guru Vivek Wadhwa wrote recently that “India is about to experience an entrepreneurship boom that will make America’s dot-com boom seem lame.”  And Indrajit Gupta, founding editor of Forbes India and a good friend of Geoskope, writes about the remarkable growth of entrepreneurship among India’s young people.

But here’s the bad news: Indian tech startup are moving overseas, mainly to Singapore and the United States, due to concerns about domestic regulatory burdens.  The Hindu newspaper quotes a Facebook executive as saying that the $22 billion acquisition of WhatsApp, the instant messaging firm, in the US was easier to do than last year’s $10 million purchase of an Indian software startup.  The executive explained that “the red tape and ambiguity in Indian rules and taxes were overbearing.”

The Indian government is moving to ease these encumbrances, but according to the Wall Street Journal “Indian startups might still prefer listing in the U.S. as investors there seem to appreciate the growth prospects of online businesses and are less concerned about present profitability.”  And even with the regulatory changes, Singapore-based firms like Flipkart, which is one of India’s hottest e-commerce companies, might not find it worth their trouble to engage domestic capital markets.


Still, the Modi government must be getting some things rightFDI inflows into India jumped 22 percent in 2014, for a total of $34 billion, even as global FDI flows fell 16 percent.  The increase meant that India placed ninth among FDI-attracting countries last year, as opposed to 15th in 2013.  The United Nations Conference on Trade and Development, which compiled the data, believes that “FDI inflows are likely to maintain an upward trend in 2015” in the country.

Bloomberg also reports that 350 private equity transactions, worth $12.69 billion, have taken place in India so far this year, as opposed to 315 deals amounting to $10.39 billion in all of 2014.

And India comes out on top of this year’s Baseline Profitability Index, which measures the relative attractiveness of 110 countries and territories when it comes to foreign investment.  The index’s compiler attributes the result to a combination of favorable growth forecasts, perceptions of decreased government corruption and better investment protections following Mr. Modi’s election as prime minister.

Finally, according to a JP Morgan survey, India is the most attractive of the BRIC markets for North American investment professionals.  A bank executive adds that “The prospects of long-term economic growth, favorable demographics, BJP’s reform agenda, numerous investment opportunities and a democratic legal system have been cited as the most attractive factors for investing in India.”
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