Indian Industrialization

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The future trajectory of India is now arguably the most significant story of any nation state in human history. As the world’s largest democracy, India is a blend of 1.4 billion people rich in both complexity and opportunity. From the ghats of Ganges to the bustling tech epicenter of Bangalore, India embodies a fascinating juxtaposition of ancient and ultra-modern, of tradition and transformation. 

Over the past several weeks here in India, I’ve glimpsed the dynamics shaping this nation. While my overall understanding is still in its infancy stages, this piece represents an opportunity to synthesize some thoughts on a topic that I feel is important to the past, present, and future of India and the world.  

Core to the global economic narrative over the past several centuries is industrialization. It is what brought humanity from what we read about in history books to what we live and breathe today. The pros and cons have been debated for decades, but regardless of opinion, it is omnipresent and the results profound. We have bore witness to the industrialization of western economies of the U.K, U.S., and China. Now, it is time to sit back and watch India’s story unfold.

Why is the future trajectory of India so important? The full answer is too long for one blog post, but one thing that can be easily pointed to is the opportunity to improve the quality of life for its citizens. India is now the largest country in the world and its population is subject to large-scale poverty. 

According to recent data, nearly 46.5% of India's population lives on less than $3.65 a day, underscoring the urgent need for economic transformation. This means there were approximately 654 million people in this income bracket. Almost double the population of the U.S. An astoundingly large figure.

Given industrialization’s track record of improving wages, India represents the largest poverty reduction opportunity today. If the goal of economic development is to bring people out of poverty, we as a world should be following and supporting this transformation. 

India’s Past

In order to understand where the present and future lies, its important to understand the past. India has already grown through periods of exponential growth in its own right, but has still managed to not fully tap into its potential. 

Impacts of the periods of British colonialism have influenced the relative lack of industrial development, as much of the economy was funneled towards services instead of manufacturing. Part of this can be attributed to disparities in educational spending from region to region and from a high emphasis on secondary and tertiary education versus primary education (IITs, IIMs, etc.) from the years 1911 to 1971. This has created a skills gab for labor-intensive work.

This has really influenced growth and maturation of the domestic services industry, which has been the primary driver of Indian economic growth to date. Today, exports of these services are two thirds as large as exports of goods. Quite a high number.

In contrast, Chinese exports of services are about 10% the size of export of goods. Exportation of services is still a relatively new phenomenon that was facilitated by the internet, so it remains to be seen how effective it is in long term economic development. That being said, we do know that India had hitched itself to this horse in the short term, leaving the industrial economy underserved. 

Some policy mishaps including the License Raj, a system of strict government control of the economy instituted in 1951, also did not help. This policy created an overly bureaucratic ecosystem where businesses were required to obtain complex licenses and adhere to strict regulations. This further hindered the growth of the industrialization within India. India’s hand was ultimately forced in 1991 with a wave of economic liberalization due to an ongoing economic crisis. P.V. Narasimha Rao, leader of the new Congress government, introduced a series of policies that abolished the License Raj, and set in motion plans to incentivize foreign investment, dismantle public monopolies, and remove other unnecessary bureaucracy. More can be found on this here.

Arvind Subramanian, former Chief Economic Advisor, was quoted in an interview (which paints a much more salient picture of the Indian economy than I ever could) saying, “China was the world’s factory but India was going to be its back-office”. This was the reality for the first decade+ of the 21st century, a result of policy changes from the 90’s. 

Infrastructure Boom

While there are many dynamics playing out in India’s industrial journey, there is one tidal shift that is becoming profound. This shift is Indian investment in infrastructure. A constraint on the economy for many years has now been highlighted as a focal point under Narendra Modi and the BJP’s rule. This bodes extremely well for Indian industrialization as infrastructure sits squarely as the base in a hierarchy of needs. A foundational component. 

To make manufacturing possible, roads are needed to move goods. Power needs to be readily accessible to make more goods for cheap. Water, telecommunications, airports, toilets and shipping ports are also integral of any industrial progress. The Indian government has recognized this and is taking the necessary measures to close the gap between them and other global powerhouses. These measures look like $120 billion (USD) budgeted in capital expenditures for FY 2024, 37% higher than the previous year and more than double spent in 2019

Concrete is one good way to measure infrastructure progress. Other notable developments include a doubling in road miles in a decade (49k miles →90k miles), a massive push to electrify rural areas, world-leading turnaround times at shipping ports + record cargo volume, massive increases in operational airports, and increase in tap water access. All signs of a healthy and ascending nation state. 

Policy Evolution

Given all of this, India is now positioned to make tangible strides forward in manufacturing and other industrial processes. Modi had wanted this to happen even a decade earlier with the “Make in India” initiative of 2014, but the timing wasn't quite right. Aside from infrastructure not being quite ready, there were still large skill gaps, difficulty access to financing for fixed capital costs (machinery, factories, etc.), and global competition. The “Make in India” initiative had set a goal of manufacturing sectors to contribute 25% of total GDP by 2022. Today, that number sits at 17%.

Arvind Virmani, a member of Niti Aayog (leading public policy think tank in India), poses that the government needs to continue to encourage a pro-competition and pro-investment environment, manage externalities, and provide suitable public goods (infrastructure), so that the private sector can, “play its role to compete, innovate, and invest”. This is most likely the approach to the future success of industrialization in India, and is already starting to see itself play out via big multinational corporations placing large bets. Now that the Indian government is showing signs that it will hold up its end, I believe the country will start to bear fruit of the massive private sector investments.

Global Shifts

What India has going for them today that they didn’t quite have a decade ago, or at least not at the same magnitude, are the winds of a shifting geopolitical landscape. As we shift from a unipolar hegemony to a multipolar order, it has rapidly become consensus that India should play a key role in the West’s ability to tame and balance the rapid ascension of China as a competitor and potential adversary. This makes Indian industrialization all the more important for us here in the U.S. 

This change has caused U.S. companies to shift consensus in short order to India being a more favorable destination for business than China. A survey from UK market research firm OnePoll revealed that of 500 exec-level U.S. managers surveyed, 61% of them would pick India over China if both countries manufactured the same materials. 

A stiffening relationship between the U.S. and China, Xi Jinping’s behavior and rhetoric towards multinational businesses, a unique cost arbitrage, and access to a large and growing consumer base has helped evolve India as a desirable alternative to conduct manufacturing operations. 

Apple is one notable example of this change. The company’s supply chain has long been reliant on China and as of 2023, in partnership with Foxconn, 95% of all iPhones, AirPods, Macs and iPads are made in China. Given the emergent threats posed by geopolitical uncertainty and tail risk from both the Chinese and U.S. government actions, Apple has had to re-evaluate how it wants China to fit into its long term supply chain vision. Diversification into India has emerged as an emerging strategy with the company looking to scale production in India by five fold in the next 5 years and to have 1 out of 4 iPhones made in India (up from 1 out of 7 today). What’s keeping Apple from completely derisking itself from China? An immense skills moat that has been the result of years of investment and training. In order for India to be a completely viable option for Apple and other multinationals looking to reshore manufacturing, education and skills training are paramount. 

Aside from the geopolitical tailwinds that play in favor of industrialization in India, there is a new reason why India needs to focus more on manufacturing. The acceleration and usage of artificial intelligence in mass market enterprise solutions poses an existential threat to services industries around the globe. Given India’s heavily reliance on services, it would be in their best interest to diversify in order to insulate the economy from any potential shifts.  

Think of the massive call centers, administrative work, and software development that currently takes place in India. AI and LLMs are poised to collapse these cost curves and threaten the viability of these business models. This makes the shift to manufacturing of goods all the more important for the domestic economy. While India does have the necessary higher-education system to identify how AI can support services businesses, the fundamental risk this technology provides offers more incentive for the government to act quickly. 

With the world's eyes firmly fixed on its horizon, India stands at the brink of a historic leap, blending its rich heritage with technological and industrial advances. As infrastructure booms and shifts towards a competitive and investment-friendly ecosystem take place, the nation is poised to redefine its role on the global stage. 

Beyond its global ambitions, India’s industrialization offers a beacon of hope for humanity’s collective progress. An unprecedented opportunity to pull millions out of poverty, we are bearing witness to a transformation that is a testament of human ambition. Beautiful, really.