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INDIA ECONOMIC DEVELOPMENT AND BUSINESS OPPORTUNITIES Arun Maira The Boston Consulting Group Barcelona November 22, 2004 INDIA: PAST, PRESENT, FUTURE Phase 1: The Past US $ Mn 30000 17th largest economy CAGR = 3.9% Phase 2: The Present Phase 3: The Future 12th largest economy 3rd largest economy CAGR = 5.1% Expected CAGR = ~ 9% 25000 15000 10000 5000 2000 1000 CAGR(1) = 8 % 400 0 1950 1960 1970 1980 1990 2000 2003 2010 2020 2030 2040 2050 (1) Tenth five year plan (2002-2007) Note: CAGR = Compounded Annual Growth Rate Source: Industry estimates -1- INDIA HAS REGISTERED THE FASTEST GROWTH AMONG ALL MAJOR DEMOCRACIES IN THE RECENT DECADE Phase 2 India has the fastest growth among all democracies having GDP > $ 100 Billion Annual GDP growth rate 11% 10.3% 10% 9% 8% 7% 6.0% 6% 5% 3.5% 4% 3.1% 3% 2.9% 2.8% 2.5% 1.7% 2% 1.6% 1.5% 1.3% 1% 0% China US India Brazil Mexico UK Finland Italy France Japan Germany Source: 2002 World Development Indicators Report (data for 1990-2000, average annual percentage growth) -2- BY 2050, INDIA IS PROJECTED TO BE THE 3RD LARGEST ECONOMY IN THE WORLD Largest economies in 2050 GDP in 2050 (US$ Bn) 50,000 45,000 ~44,500 40,000 ~35,200 35,000 Huge gap between three largest economies and the next few ~27,800 30,000 25,000 20,000 15,000 10,000 ~6,700 ~6,100 ~5,900 5,000 ~3,800 ~3,600 ~3,100 0 China US India Japan Brazil Russia UK Germany France India to overtake France in 2018 Source: Goldman Sachs Economic Paper # 99, BCG Analysis -3- POPULATION IN SOME COUNTRIES IS RAPIDLY AGEING Problem Most Pronounced in the Developed World ...this will have several socioeconomic implications (select examples) Shortage in workforce Median age of population in the OECD countries is rising ... Median age (year) (Average for OECD countries) 50 45 40 42.4 45.8 39.6 35 33.6 29.6 Potential decline in growth rates Increase in wage rates for workers 36.5 30 25 44.5 30.9 Pressure on social security and pension systems 20 15 Increase in services to the older population 10 5 0 1970 1980 1990 2000 2010 (E) 2020 (E) 2030 (E) 2040 (E) Source: Scarpetia and Blöndal; United Nations Population Division, World Population Prospects, The 1998 Revision; BCG analysis -4- THE FUTURE DEMOGRAPHIC MAP Potential surplus population in working age group (2020) Germany -3 Mn UK -2 Mn 0Mn -1 Mn Iraq Ireland US -17Mn France Spain -3 Mn Czech Republic 2Mn -3 Mn -2 Mn 2Mn Israel Iran 0Mn 3Mn 4Mn Egypt Mexico -6 Mn Turkey Italy 5Mn Russia China Pakistan 19 Mn 47 Mn -10 Mn -9 Mn Japan 5Mn 7 Mn Bangladesh Philippines 4Mn India Vietnam 1Mn Malaysia 3Mn 5Mn Indonesia Brazil -0.5 Mn Australia Note: Potential workforce surplus is calculated keeping the ratio of working population (age group 15 – 59) to total population constant and under the assumption that this ratio needs to be broadly constant to support economic growth. Therefore, India will have 47 Million more people in the working age group/total population by 2020 compared to today, while France will have a deficit of 3 Million people in the working age group compared to today. Source: U.S. Census Bureau; BCG Analysis -5- INDIA WILL CONTINUE TO HAVE A GROWING POPULATION TILL 2050 AND BEYOND Projected population growth rates Net population Bn people 1.8 India: Continuing to grow upto 2050 1.5 China: Declining after 2032 1.2 0.9 Brazil: Declining after 2050 0.2 0.6 G6:Declining after 2050 Russia: Already declining 0.1 0.3 0.0 2001 2008 2015 2022 2029 2036 2043 2050 Source: Goldman Sachs Economic Paper # 99, BCG Analysis -6- IN 2010-2030, LARGEST SHARE OF INDIA`S POPULATION WILL BE IN THE WORKING AGE GROUP Resulting in a Favourable “Demographic Bulge” India Demographic Profile (2020) Age group 80+ 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 60 -60 China Demographic Profile (2020) Age group 80+ 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 40 -40 20 -20 0 20 60 40 Mn people 60 -60 France Demographic Profile (2025) Age group 80+ 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 40 -40 20 -20 0 20 60 40 Mn people 3 -3 2 -2 1 -1 0 1 2 3 Mn people 20 - 35 age group : 20 - 35 age group : 20 - 35 age group : 325 mn people (~25 %) 308 mn people (~21 %) 11 mn people (~17 %) Female Male Source: CII Conference 2002; CSFB Report; UN Population Division; BCG Analysis -7- ECONOMIC GROWTH BECOMING MORE INCLUSIVE Level of affluence steadily increasing in India Distribution of people by income group (1995 vs 2002 vs 2007) Number of people (million) 1200 1099 998 1000 886 272 800 163 600 248 446 Middle to High Additional 283 mn people from '95 to '07 433 Lower Middle Additional 185 mn people from '95 to '07 220 Low 399 400 200 475 327 0 1995 2002 2007 Note: Categorisation of households on the basis of income (Rs pa) at 1995 prices: Low : <=22,550; Lower middle : 22,501-45,000 ; Middle to high : >45,001 Source: Statistical Outline of India, 2002 -8- DEMAND ALSO RISING IN RURAL INDIA Rural India consuming a high share of many “non essential” consumer goods % Share for 2000 100% 19% 32% 80% 44% 49% 63% 67% 37% 33% TV Colour Shampoo 60% 40% 81% 68% 56% 20% 51% 0% B&W TV Cassette Recorder Ceiling Fan Motor Cycle Rural Urban Source: NCAER 1999-00; Literature review -9- INDIA TO BE 3RD LARGEST ECONOMY, BUT WITH RELATIVELY LOW PER CAPITA INCOME Pattern of Growth Not Witnessed By Any Other Country GDP vs GDP per capita in 2002 GDP (US$ Bn) 14000 GDP vs GDP per capita in 2050 GDP (US$ Bn) 60000 China 12000 50000 US 10000 US 40000 India 8000 30000 6000 Japan 4000 2000 China India Brazil Italy Russia 0 0 20000 Italy Germany France Germany Russia 10000 UK Japan Brazil France UK 0 10000 20000 30000 40000 50000 GDP per capita (US$) Source: Goldman Sachs Economic Paper # 99, BCG Analysis 0 20000 40000 60000 80000 100000 GDP per capita (US$) Bubble size corresponds to GDP size - 10 - TWO INDIAS: ONE COMPETING INTERNATIONALLY; THE OTHER BEHIND IMPLICATIONS "COMPETITIVE INDIA" PROVIDES OPPORTUNITIES IN INTERNATIONAL TRADE AND BUSINESS POOL OF LOW COST RESOURCES INDIA SHINING EXTENSION OF BENEFITS OF GLOBALISATION THE WORLD LARGE POOL OF LOW COST RESOURCES YET TO BE TAPPED THE CHALLENGE AND BENEFITS OF 'INCLUSIVE DEVELOPMENT' - 11 - INDIA OFFERS EXCEPTIONAL VALUE AT SIGNIFICANT COST ADVANTAGES Comparison of Manpower Costs Comparative salaries of an IT engineer $ pa Comparative salaries of an MBA $ pa 125,000 100,000 80,000 100,000 75,000 75,000 50,000 50,000 50,000 25,000 25,000 7,500 5,000 0 0 India US India US Source: Literature Survey - 12 - INDEPENDENT SOURCES CONFIRM INDIA IS BEST IN QUALITY AND QUANTITY OF PEOPLE FOR GLOBAL SERVICES Surplus India Indonesia Brazil Projected workforce in 2020 Mexico Malaysia Israel Ireland Turkey China Philippines Russia Shortfall High Low People strength • Productivity/quality • English language skills (1) • Cost Note: Pakistan, Bangladesh and Vietnam have not been represented for lack of reliable data on productivity and cost of service employees (1) Over 50% of shortages expected from English speaking countries Source: World Competitiveness Yearbook 2001, Britannica yearbook, Literature search; BCG analysis - 13 - SOMEDAY REAPING WHAT YOU SOW INDIA'S LEGACY INDIA'S OPPORTUNITIES • Vertical integration • Small volumes, but growing • Logistics & infrastructure problems MASS MANUFACTURING Small volume, high variety, low cost mfg REMOTELY PROVIDED SERVICES INDIA'S STRENGTHS • Domain knowledge • Software capabilities • Remote delivery possible - 14 - INDIA EMERGING AS THE " SERVICE CAPITAL OF THE WORLD " India already providing knowledge-based services in several sectors Remotely delivered services Industry Transaction processing Design and analysis Information Tech Research and developme nt Pharma/Healthcare Education Services Import of customers to service in India Value added tourism Leisure tourism Auto/ engineering Chemicals Financial Services Source: BCG Analysis - 15 -