India: My Impressions of 16 States & 17,000 km
One of the things I enjoy is to observe how humankind organizes itself, and to chronicle some of the long-wave changes that are shaping a country.
Over the past few years I have traversed 16 states across India, with over 17,000 km of rubber on roads.
This year’s road trip was particularly interesting, as India is emerging from a widespread lock-down in a bizarre year.
The following are some impressions of the long-wave changes that are shaping India.
India Mental Model: Three Buckets
A useful mental model is to think of India as 3 buckets.
India 1 (75–100 million population): Premiumization
India 1 thinks, acts and consumes like a Westernized, high-income country. A decade of uneven prosperity accruals has meant that this demographic wields the maximum wallet power in terms of moving the economic needle. This cohort is increasingly becoming comfortable with high-value purchases.
India 1 is breaking with India’s historical tendency of suppressing conspicuous consumption.
Specifically, this translates into migrating to SUVs/premium sedans/premium Realty/premium Consumption. As virtue signalling gains traction, more conspicuous consumption is becoming increasingly commonplace. The trend germinated gradually in the first half of the past decade, and has accelerated visibly in the second half. This trend is likely to strengthen in the coming decade.
India 2 (250–300 million population): Value mindset with strong aspirational trend to join India 1.
India 2 tends to be self-employed, run small businesses, or hold employment in Tier 2/3 towns. This cohort has been traditional accumulators of hard assets, or invest in debt-like assets.
The proliferation of high-speed internet has reduced information asymmetry.
Financial inclusion has deepened over the past few decades, and shrinking information asymmetry is blurring the lines of Consumption divisions that existed earlier. For instance, farmers in small villages/towns have local WhatsApp groups. This forum is used to communicate price information, at the click of a few buttons. As price information gets aggregated and disseminated, price discovery has set in. This enables producers to demand better unit economics. The lazy middlemen who used information asymmetry to extract rents needs to rethink their raison d’etre.
One of the BJP government’s big successes has been UPI (Unified Payments Interface). Even historically cash-loving states are moving to a UPI-powered world. States that historically featured high cash usage in daily transactions are visibly moving towards embracing digital payments. Unlike the West — where Payments is profitable — this wave resembles the Chinese model. As a standalone business, Payments is not as lucrative as the West. Facilitating Financial Aggregation will become a necessary component of payment processing business models.
The rise of high-speed internet, ease of transacting daily business are permanent changes shaping cash usage.
India 2’s shopping behaviour has evolved from buying cheap knock-offs to buying reasonably priced originals.
This Consumption trend is likely to strengthen in the coming years. One example of India 2 Consumption: John Deere AC tractors (60 HP tractor, Rs. 1.3–1.5 million; $20,000 price point). Historically, the average purchase price range for a typical tractor in India has been in the Rs. 3–6 lakh ($6–8,000) range. For the first time in my journeys, there was a visible increase in Green-Yellow John Deere tractors across the country. The catalysts that are driving this trend are low interest rates, and demand for premiumization in the consumption value chain.
India 3 (700–1,000 million population): Basic necessities
India 3’s biggest gift is low interest rates.
Access to finance will feature highly for this cohort (Small Finance Banks, Microfinance institutions, Payments, Building Materials). Once access to finance is optimized, the next legs will be consumption of roti-kapda-makaan (food-clothing-shelter). Lower price points but branded clothing, consumer discretionary is a long-term trend for this cohort.
However, in aggregate wallet share, this cohort is unlikely to move India Inc’s profits needle much.
Difference in development trajectories of Congress-history vs BJP-history states
An understanding of political economy is crucial, as it directly impacts Policy, and in turn, financial markets.
There is a noticeable difference in development trajectories between Congress-history and BJP-history states. The most immediately noticeable changes manifest in the form of superior road/hotel infrastructure, general hustle among the SME business class, and appearances of wealth.
Congress-history states demonstrate years of lack of reinvestment, generally lower tolerance to following the law, and a residue effect (the best brains have migrated to other cities/countries).
BJP-history states demonstrate relatively better performance on the infrastructure front. They also tend to be more business friendly. Corruption, though, is a common currency that transcends political party lines!
The Congress states I visited were implementing an 8 PM-6 AM daily lock-down. This has most severely hit India 3. India 1 generally relies on stable employment and asset ownership for income. The financial markets have been helpful on this front. India 3, by contrast, relies primarily on self-employment, and/or low value gig economy jobs for livelihood. The recent lock-downs have had a debilitating effect on this cohort. Unlike the West, India does not have an extensive Social Security net. This has meant that states implementing lock-downs are hit more severely than the ones that are more open. COVID has had its impact on travel: 5-star hotels were available at 3-star rates.
The BJP government under Modi is encouraging the developments of Food Parks across the country. These Food Parks act as a single point aggregator of agriculture produce from neighboring markets, and facilitate transactions. As a general trend, the Modi government seems focused on replacing India’s massive, disjointed, innumerable middlemen class with a handful of large middlemen. One may argue the pros and cons of this development (will rent-seeking reduce over time, or will it increase once oligopoly sets in?).
Impressions on some prominent Indian States
Uttar Pradesh is showing signs of adopting a weird concoction of a Bare-knuckled Governance model. The powers-that-be are attempting to use the figurative whip to browbeat a historically unruly state to shape. One might argue at the means but there is a section that believes this model of leadership is what may be required to correct historical misdirection. Road infrastructure, particularly the National Highways, have improved markedly. The shift to a more law-abiding state would be a welcome development. However, there is a lot of progress to be made.
Rajasthan has sort of stalled. The state has been well represented by Mining and Cement industries. However, the major tourist cities wear a fatigued look. Sort of an anachronism that is being compelled to evolve rapidly to the demands of the present day. For example, a tourist favorite — Udaipur — was underwhelming. For a city with a rich heritage, development has been gradual. Tourists prices are equivalent to some of the world’s best heritage monuments. But the value on offer is a tiny fraction of it.
Madhya Pradesh has shown visible signs of improvement since the last time I visited the state (2015). Road infrastructure, particularly the National Highways, has become world class. The NH3 stretch from Agra to Indore is one of the best in the country. 4-lane expressways support average cruising speeds of 100–120 kmph for cars/SUVs (average speeds in my previous trip was less than half of this). Truck speeds have been increasing as well, which augurs well for Logistics companies. Eat-out infrastructure needs to catch up.
Gujarat has an interesting evolutionary history. It has had to pick its specialization. The Technology wave was lost to Karnataka (Bangalore) and Andhra Pradesh (Hyderabad). Automobiles were lost to Tamil Nadu. Gujarat initially picked up the baton handed over by the Mumbai textile industry. Subsequently, it picked Chemicals and Energy. About half of India’s natural gas imports are routed through Gujarat. For India to fulfill Modi’s ambitions on Green(er) energy, Natural Gas will have to play a leading role. Cities have progressed materially over the past decade. Infrastructure is among the best in the country. The downside is a mess of air pollution.
Tamil Nadu and Kerala are by far the most developed states in India.
The road infrastructure in Tamil Nadu is the best in the country. Even State Highways are better than National Highways in some northern states. Tamil Nadu is a highly industrialized state, enjoys a high literacy rate, and a population with a visible can-do spirit. From a power deficit state, Tamil Nadu has become self-sufficient in power. Tier 3 towns have grown remarkably in the past few decades. Building Materials malls dot the entry roads to many tier 3 towns.
Kerala has taken lack of space and turned it into a fine balance between environment and livelihoods. Remittance flows and indigenous entrepreneurship have supported development over the decades. Notably, both states have had neither the Congress nor the BJP as the primary ruling political party over most of their histories.
Telangana, under the KCR government, has exhibited signs of a shift towards a more technocratic government. Compared to its relatively more industrialized sibling — Andhra Pradesh — Telangana’s fortunes have historically ebbed and flowed with those of its primary economic engine: Hyderabad. Road infrastructure, while improving, has much catching up to do. It is a state with much wealth, but mostly residing in hard assets. Andhra Pradesh has developed along its ports, agriculture and aquaculture hubs. Shrimp farming has been another long-term success story in India over the past two decades. Road infrastructure is better than Telangana.
Digital-first opportunities with long runways of growth will likely be non-linear wealth creators
Low interest rates mean that asset heavy/commodity-first businesses with low scarcity value will behave like High Yield Debt on returns, and like Equity on risk. They may offer special situation opportunities, but may not be the best candidate for long-term compounders.
In my opinion, India 1 is likely to be the primary wealth creation engine over the next decade. India 2, and migrants to India 1, will offer reasonable long-term opportunities. India 3 has much catching up to do to contribute meaningfully in aggregate.
In the unevenness lies opportunity.
