The automobile industry comes of age

When Maruti started production in India, the total domestic market in India was just about 40,000 passenger vehicles. Maruti made its millionth vehicle in 1994, and at that point in time the total market size was just about 250,000 passenger vehicles per annum.

India was not known as an exporter of automobiles and no one really expected that to ever happen. However, the export growth in the last 5 years have been as stunning as the growth in domestic sales, if not more. From a mere 53,125 passenger vehicles in 2001-02, exports have exploded to 176,000 units in 2005-06 and are expected to cross 200,000 units this fiscal. That's truly amazing. We export volumes that we were consuming domestically just 12-13 years ago.

Now obviously if we are able to export such numbers, the quality of the products must be of international class. The quality and productivity improvements have delivered lower price to the consumers too. I remember Maruti Zen was introduced in 1993 with a price tag of Rs 350,000. Today superior vehicles are available at lower nominal values. If we factor in inflation, car prices have virtually halved during the last 10 years. Meanwhile salaries have gone up by a factor of 5-6.

"The small car hub" is a dream that is being realized fast.

Urbanization

Urbanization is the lifeblood of a modern economy. A modern economy does not rest on rural activities. In 1950 only a quarter of the countries in the world had more than 46 per cent of their population living in urban areas, but by 2000 nearly half had 57 per cent or more of their population living in urban areas. A UN Study forecasts that by 2030 over three-quarters of all countries or areas will have over half of their population in urban areas.

The most urbanized countries or areas are located in Europe, the Caribbean, Oceania, South America, South-eastern Asia and Western Asia. These also happen to be countries with high level of per capita income.

On the other hand, about a third of the least urbanized countries are in Africa, the rest being in Oceania, South-central Asia and South-eastern Asia. No prizes for guessing their per capita income levels, these are among the lowest in the world.

(A list of highly urbanized and less urbanized nations as per data of year 2000, reinforces the points made above – USA – 77.4%, Japan – 78.8%, Germany 87.5%, UK – 89.5%, France – 75.4%, Indonesia – 41%, Pakistan – 33%, Bangladesh – 25%, Ethiopia – 15%)

The transformation of China on the back of rapid economic growth gives us clues to what to expect in India. China had urbanization levels of just 12.5% in 1950 (India had 17.3% urbanization then). From then on it had gone up to 36% in 2000 and is forecasted to reach 59.5% by 2030. Slower pace of development in India during the last century meant that our urbanization levels were only 27.7% in 2000. This is expected to grow to 41% by 2030, or even higher depending on the pace of economic growth. This means that at least 150-160 million people will migrate to cities during the next 25 years. Clearly, our cities are not big enough for this.

The answer lies in rapid build up of urban conglomerates around existing large cities in different parts of the country and simultaneously building entirely new cities afresh. However, there is also a simultaneous large issue of building services for the rural community to control rapid influx into the cities that are not ready to take in more.

This is an interesting blog which deals with the issues of rapid transformation - A Brief Introduction To RISC — Rural Infrastructure & Services Commons. The author puts a very compelling argument for tackling the issues arising out of the transformation. It’s a pretty good recipe for the policy makers to take note of.

The changing face of India’s foreign trade

The last 5 years data for International Trade, depicts a clear trend. India’s key trade partners are changing rapidly. First of all, the volume of international trade has expanded rapidly from $95 billion in 2001-02 to $252 billion in 2005-06. This is a remarkable growth (21.5% CAGR) and is one of the key drivers of economic growth. International trade in value terms is still about 1/3 of the GDP, so there is considerable room for continued expansion of International trade.

A look at some of the leading trade partners during this period shows the remarkable growth in trade with China. China, from nowhere, is now the second most important trade partner for India (figures in $ millions).

It looks likely that in another 5 years China will be as important as The US for India as a trading partner. The diagram below shows the increase in trade with some of the leading partners.

Clearly China, Korea, Singapore are integrating much faster with India, than the erstwhile mainstays – USA, Japan and UK. The USA, is of course such a large partner, and the base effect in its case was higher. However, the trends clearly show an increased Eastward focus. This is even more apparent when one starts looking at the figures for other ASEAN countries.

The BRIC forecast

The Hindu has an interesting view on the The Goldman Sachs report on Brazil, Russia, India and China (BRIC).

“The co-author of the BRIC report, while presenting the same here, raised concerns over the levels of secondary education in India. This is an important variable in the model and in comparison to others in the report, it is an area where India stands weak”, the article states.

The article further says, “On applying the model to various economies as they stood in 1960 and comparing the current levels of these economies as against what the model would have projected, none of the Asian economies have shown parity. The actual GDPs are higher than that projected in Hong Kong and Korea and much lower in countries such as India.”

It is important to note that if India doesn’t get its act together fast, it may well under perform the expectations again. The crux of the matter lies with how the rural sector is addressed. Rural India still accounts for over 70% of the population. The real boost to the rural sector can come only through massive investment in rural infrastructure and enabling the rural population to participate in the gains of a modern economy. This will involve massive spending on rural irrigation, roads, rural education and rural marketing. These are not very glamorous areas and are not considered news worthy (or vote worthy). However, this is where the real multiplier will come from. It will create a new class of consumers for the industrial sector.

This is but one of the areas to address. There is actually no room for complacency. The old foe Murphy, is worth quoting:

• Anything that can go wrong will go wrong.
• If there is a possibility of several things going wrong, the one that will cause the most damage will be the one to go wrong. Corollary: If there is a worse time for something to go wrong, it will happen then.
• If anything simply cannot go wrong, it will anyway.
• If you perceive that there are four possible ways in which a procedure can go wrong, and circumvent these, then a fifth way, unprepared for, will promptly develop.
• Left to themselves, things tend to go from bad to worse.
• If everything seems to be going well, you have obviously overlooked something.
• It is impossible to make anything foolproof because fools are so ingenious.
• Whenever you set out to do something, something else must be done first.
• Every solution breeds new problems

Rising Inequality - The stealth Bomber

Paul Krugman made an interesting observation about the reduced egalitarianism in the American society. This is how he sees it:
“To get a sense of just how dramatic that shift has been, imagine a line of 1,000 people who represent the entire population of America. They are standing in ascending order of income, with the poorest person on the left and the richest person on the right. And their height is proportional to their income -- the richer they are, the taller they are.
Start with 1973. If you assume that a height of six feet represents the average income in that year, the person on the far left side of the line -- representing those Americans living in extreme poverty -- is only sixteen inches tall. By the time you get to the guy at the extreme right, he towers over the line at more than 113 feet.
Now take 2005. The average height has grown from six feet to eight feet, reflecting the modest growth in average incomes over the past generation. And the poorest people on the left side of the line have grown at about the same rate as those near the middle -- the gap between the middle class and the poor, in other words, hasn't changed. But people to the right must have been taking some kind of extreme steroids: The guy at the end of the line is now 560 feet tall, almost five times taller than his 1973 counterpart.”
He goes on to explode a few myths (as he calls them), namely:
“MYTH #1: INEQUALITY IS MAINLY A PROBLEM OF POVERTY.
It's not only the poor who have fallen behind -- the normal-size people in the middle of the line haven't grown much, either. The real divergence in fortunes is between the great majority of Americans and a very small, extremely wealthy minority at the far right of the line.
MYTH #2: INEQUALITY IS MAINLY A PROBLEM OF EDUCATION
The richest twenty percent are those standing between 800 and 1,000. But even those standing between 800 and 950 -- Americans who earn between $80,000 and $120,000 a year -- have done only slightly better than everyone to their left. Almost all of the gains over the past thirty years have gone to the fifty people at the very end of the line. Being highly educated won't make you into a winner in today's U.S. economy. At best, it makes you somewhat less of a loser.
MYTH #3: INEQUALITY DOESN'T REALLY MATTER.
It's easier for a poor child to make it into the upper-middle class in just about every other advanced country -- including famously class-conscious Britain -- than it is in the United States. Not only can few Americans hope to join the ranks of the rich, no matter how well educated or hardworking they may be -- their opportunities to do so are actually shrinking. As best we can tell, pretax incomes are now as unequally distributed as they were in the 1920s -- wiping out virtually all of the gains made by the middle class during the Great Compression.”

India would do well to take note of this and try and address the issues so that such an event does not occur here. If it does the results will be catastrophic. Inequalities are visible and will be manifested in rising crime rates. If unchecked, it will further lead to anarchy and breakdown. The price is way too high for comfort.

The rising inequality is like a stealth bomber. It creeps up unnoticed and then creates catastrophe.

The Great Indian Demographic Shift

The NCAER defines the Middle class as the one with household income between Rs 200,000 and Rs 1000,000. In 2001-02, the middle class consisted of 10.7 million households (5.4% of the total). The middle class owned, among other things, 7 million motor cycles, 7.3 million CTV, 6.2 million Refrigerators, 1.5 million AC and 3.2 million cars.

The total number households with income over Rs 200,000, was 11.5 million (6.2%). This is the rich class added to the middle class, a combined class of significant interest to marketers of consumption items.

Further, the analysis of NCAER indicates that the population having household income of over Rs 200,000 has increased and will continue to increase as follows

• 4.8 million HH, 2.9% of the population in ’95-96
• 11.55 million HH, 6.13% of the population in’01-02
• 18.12 million HH, 8.9% of the population in ’05-06
• 32.25 million HH, 14.5% of the population in ’09-10

The average HH is equivalent to 4.8 people.

Thus, in 4 years leading up to the current year the population of this class has increased by 57% and now consists of about 87 million people. This number is set to increase by another 78% during the next 4 years to reach 155 million.

This is a huge demographic shift by any standards, almost doubling in 5 years.

Further, the next class defined by NCAER (Rs 90,000 to 200,000 pa HH income), is also showing a similar trend:

• 29 million HH in ’95-96
• 41 million HH in’01-02
• 53 million HH in ’05-06
• 75 million HH in’09-10

It is this segment which moves on to the higher income segment. The figures indicate that the upper segment will keep increasing at these high rates and the great demographic shift will continue for quite some time.