At the Telecom Leadership Forum 2022, Hariom Rai, Chairman and MD, Lava International Ltd, presented a talk on the challenges Indian companies face today, and how to over come. His talk was on the key to unlock India's potential.
Holistically, how is India going to progress from power to wealth. If we understand the fundamentals, things become very simple. If we can deploy that into any other sector, it is going to work similarly, but right now, I'm going to speak in context of electronics.
So, what is the big picture? Let's understand first, so, Bharat has had 5,000 years of economic dominance. We were 25% of the global GDP, when the Britishers came, they brought the GDP down. When they left us in 1947, with 3.9% of the global GDP, what we have done in the last 75 odd years has brought us further down to 3.1% of global GDP.
First, and the most important thing for us is to understand that whatever we have done with the country, it has not served us well. Let us also look at it from the different context. We were really left behind when the whole of Asia kept progressing. We were almost similar in 1960s, when the per capita income for Japan, Korea, Taiwan, China and India, were almost similar. Japan was a little ahead, but was almost similar. Look at what happened to us and where we are.
We were not been able to progress. Let's try to unlock as to why it happened. Let's first understand the process of growth. Finally, whether it is a family, or a company, or a country. Finally, when you are at a low level of stage, or, the issue is in the knowledge and skills, that's all whether it's an individual or a family or a country.
Stage one for a developing country -- it lacks knowledge and skills. What needs to be done is that you have to deploy your people in the agriculture and in manufacturing, because it has the most use of limited productive skills. It is also called the volume deployment of workforce. We know that we have not been able to actually kickstart the manufacturing in a greater manner. What we do is after the second stage, which is the value creation stage. You keep the money targeted for fastest technological learning, which means what you need to do is to radically restructure the agriculture. You can also acquire higher level of skills in technology in the manufacturing domain.
To give you a context, India has 1.6 times has land, and then there is China. Yet, our , China's production is double that of India. We have 160 million hectares, and China has about 104 million hectares, which means that 1.6 times land, but the China production is double. The opportunity for us is to produce more. But, why don't we produce more?
If we produce more, what will happen? We have to understand that the opportunity of country and why we were 25%, because God has given us everything, Let's understand the post-nuclearization era. Before the world became nuclear, countries used to make colonies. After nuclearization, there is a new world order. How to make colonies and how to how to ensure that the richer countries are getting richer.
Economy at heart of agenda
The fundamental is the economy. The economy is at the heart of the government agenda. Whatever the government requires to do, whether it is to build the social and physical infrastructure, or you have to build your defense and security. Or, you have to redistribute the money from the rich to the poor. For all, you require money. For that, the economy is at the heart.
You build businesses to take share from the global pie. That's what the world has done. What is the process? We have to understand that nations are rich only if their companies are rich. That's the only process of growth about how to build companies. Only the large companies can compete on the global scale. The winner takes all is the principle.
How do we build those companies? First is the nurturing, where you protect and support the infant industries. Then, you enable them to attain scale to compete globally. This has become the new military system of the developed world for making colonies. The only process of building a robust economy is champion companies.
Building champions
Let's understand how the champion companies work. It's a top down champion companies which means very large companies. Once you have developed a company, in China, I've seen factories employing 1 million people, people in just one factory. If you have 1 million people in this factory, you have giant companies supporting you. Maybe, companies employing five hundred thousand people. Then, to support the giant companies, you have large companies company deploying 100,000 people, to support these large companies. You have MSME companies, and to support these MSME companies, there are very small companies to support that. That's how you create the ecosystem.
You need to have such a large ecosystem. When I go to China, I see hundreds of restaurants in a row, and each restaurant is really running well. There's so much of the ecosystem, and there are so many people earning a lot of money. They are going to all the restaurants. Consumption is at a very high level.
In India, I see at certain places, there are 5, 10, and even 20, restaurants, and suddenly, you will see restaurants going down. That is because of the fundamentals. We don't have very large economy built on the basis of manufacturing. So, what does this ecosystem does? It becomes globally competitive manufacturing and service ecosystem employing millions of people. It starts doing exports. The whole focus is how can you take share from the global GDP.
To take share from the global GDP, you focus on exports. Whether it's goods or services, you have export and get the export surplus. That export surplus multiplies in the economy as an economic multiplier. When you have a very large ecosystem, then the kind of farm production, you consume, whatever the farmers produce. The farmers also become very wealthy.
Sometimes we see farmer produces, but they have to leave their farm production and the farms itself, because there is no taker. That's because we don't have a large economy. When that happens, and the farmer become very wealthy, they start creating demand for manufacturing goods and services. That's how you create a virtuous cycle in the economy.
For that, what is the impact of domestic champions economy? Let me just take you through the numbers of Fortune 500 companies. What is the revenue of the Fortune 500 companies for the global GDP? We find that companies produce 40% of the revenue in the global GDP. In Taiwan, eight companies produce 73% of Taiwanese GDP. In France, 26 companies produce 69% of French GDP. In China, 135 companies are producing 56.6% of Chinese GDP. In Korea, 15 companies produce 51% of the foreign GDP. In Germany, 27 companies produce 51% of the German GDP. In USA, 122 companies produce 47% of a giant US GDP of more than $20 trillion.
In India, about seven companies are creating nearly 13% of the Indian GDP. Four are government or the public sector firms. We have a very small economy. Only 7% is contributed by seven companies. So, this is the US vs. China in 1996. China had only one company in the Fortune 500 list. Today, China has 135 companies, it has surpassed USA. The USA has only 121 companies. This is how China has grown by making Fortune 500 companies as champion companies. This is a percentage share. China share is about 56% of their GDP of these top 135 companies. The USA has 44% of these 121 companies.
We have to understand why and how does that happen! The developed world deploys only three inputs of building champions. Number one, utilizing the domestic market to build champions. Number two, banks followed completely development agenda through the monetary policies. Number three were the fiscal inputs through budgetary mechanisms, that the other three mechanism the world has followed.
Every country is today advocating the free market, follow protectionism and champion policies to create world-leading firms. In 16th century, Britain did the same tax export of raw wool and import of clothing to nurture export-oriented wool and textile industry. In the 17th century, France followed similar policies as Britain. In the 18th century, pressure from Frederick the Great in all interventionist policies were followed. In the 19th century, the first Treasury Secretary, Alexander Hamilton, of USA, was dubbed as in the USA mother of all protectionism. Then, in 19th century, unified Germany refined and expanded the policies of Europe. Then, in 20th century, Japan learned from German protectionism, followed by Korea, Taiwan and China. This is how the world has moved forward.
On the protectionism side, on the monetary policy side, what are the modern monetary policies during development? Banks follow the development agenda. There is low return for citizens when the development agenda has been followed in the bank when they keep money, maybe 1-2%. Less return is there. But, the entire money's focused towards the development agenda and regarding discounting of loans falling in the development agenda.
Focus on exports
Export is the key criteria. What are the fiscal policies during enrollment? The government builds the necessary infrastructure to create global scale. They incentivize domestic companies to create R&D supply chain and manufacturing skills, and subsidize and incentivize to create global competitiveness. These are three important elements on the fiscal policy.
What are the outcome of the policies? High employment rate, acquisition of technology and skills, creation of world-leading firms, multi-fold rising exports, long-term financial and technological independence, virtuous cycle of demand, and finally, migration from poverty to wealth.
We need to acknowledge failure first, and then start. We opened up our economy prematurely. In 1991, we have done a great job. Money came into the country, but it never made the country productive. It went into the consumer lending, speculation of secondary market or speculation of land, but never made the country productive. Economists studied the policy, which were being followed in the developed world. They forgot to see what the development world did when they were in the developing stage. They completely forgot! And, that's is the big problem of the country. Having said that, this is the best time to take a leap. This is the big picture! Let's understand all that for electronics and IT.
Electronics and technology create the most value in the global market. Total valuation of $15.5 trillion is created by the market cap of the technology industry, which is about 17-18% of the total market cap global market cap of about $85 trillion. If you see from the GDP perspective, and similar contributions with the economic multiplier, we have from the electronics and tech industries, because the revenue is $4 trillion, which multiplies at least about four times to add value to the remaining GDP.
Roughly, $16 trillion is the value addition of electronics and IT in GDP. The electronics industry revenue is about $3 trillion. Therefore, electronics and technology are the most valuable sectors in the world. The contribution of this sector is also growing in the rest of the businesses. Electronics and technology are now being used everywhere. Today, we are very clear that the world is looking at the alternatives for manufacturing as the alternative to China. In China, the population is now aging now, but the per capita income is rising.
Job opportunities are there for people beyond manufacturing. They don't want to work for manufacturing. Wages have risen by triple in the last 10 years. The world is thinking that you are overdue depending on what country you have to go in and do a different supply chain. Geopolitical compulsions are there. Hence, the entire world is looking at China plus one. India, is the best answer because of young, unemployed live population and second-largest English speaking people in the world.
This country is the technology center for most companies. Software is the key, and we are doing software for such a long time. We have low-cost IT services. Software is key for electronics. Low wages are there in the country because of low per capita income. This large population is going to become a very large market with GDP growth. Therefore, it is the best time for any company of the world to manufacture in India in the same manner, as to how they have gone in manufacturing in China for 30-35 years.
Because of the market access, you get local manufacturing. In Vietnam, it's up to 8-9% of the Indian market, if you manufacture. Once you manufacture in India, you get a very large market, eventually to manufacture and supply to the same market.
Vision strategy
What is our vision strategy? Let's see this from the this perspective that India population is about we are 18% of the global population yet surviving on a mere 3.1% of the global GDP, which means that we have to take our fair share from the global GDP. To do that, we have to export goods and services.
We want to take electronics from $70 billion, which we manufacture in 2020, to $300 billion by 2026. We want to now go from 2020 to 2026 with $300 billion of total production, out of which $180 billion is for local consumption and $120 billion for exports.
Business eventually consolidates in the hands of very few players due to the economies of scale. The same principle is equally valid for countries as well. Only handful of companies are going to supply to the rest of the world. We have a goal that India must take 50% share of the global consumption of electronics by 2032.
We will not be only limited to companies are going to supply to the rest of the world. To build 50% globally competitive value chain India by 2032, at least in the next 10 years, this is more the target that we are taking the industry and also working with the government, and ensure that the remaining 50% manufacturing in the world cannot be competitive without using India's competitive value chain. That's the goal which we are taking.
What are the strategic imperatives for that? The entire strategy is export-oriented. In the bargain, we will also supply to the domestic economy. We need to build a globally competitive supply chain and design ecosystem in India.
How can it be built? By creating economies of scale! How can economies of scale be created? By attracting global value chains to create and to manufacture at scale. We need to mitigate disabilities. The PLI scheme has been created to build Indian champions for long-term technological and financial independence of the country.
Strategically deploying the electronic sector, and mobile phone is at the core of electronics. Once you build mobile phones, you can build anything. Every single product of hardware used anywhere else, is used in the mobile phones. similarly, whether it is in the software, is equally the same. It connects with the rest of the electronics. Once, we are able to build an infrastructure of mobile phones, anything can be built in India. This is the process of growth and dominance. Once we understand how the mobile phone business happens, you acquire skills and technology. Once you acquire the skills and technology, and if you have the economies of scale at lower per capita, your output becomes very competitive.
That's how the entire world has progressed. At 17% of Chinese per capita, India's output would be most competitive globally, once we are able to create economies of scale. It is the visionary PLI scheme to create economies of scale for global champions and their value chains to start the ecosystem. The Indian champions have a separate scheme, so that we are able to deepen the skills in the value chain inside India, for long-term technological financial independence.
China holds the largest share of the mobile phone value chain. The mobile phone value chain of 3.5% is in Europe, 10-15% in the USA, depending on segment. Japan, Korea and Taiwan have about 35-45%, and 40-50% value chain in China. That's the scenario today.
Foreign companies today occupy 90.8% share of the mobile phone market in India, and our Indian companies have 9.2% Volume market share vs. value market share should be less than 2%. Here, the Indian Indian companies were 44% of the market in 2015. They have come down to about 9.2% market today. Chinese companies have grown to become 63% of the volume market of Indian companies.
This is a situation facing the top segment of India. Apple is also coming and going to manufacture in very large scale. The segment is covered through Apple, but they have a very large Chinese supply chain as well. Apple may bring their Chinese supply chain and manufacturing to India because of some geopolitical issues. This is the challenge that we have.
Samsung has also started exporting, but it's on a losing spree. Chinese companies today command the largest market share in the value chain in the whole world. They are, sort of, not bringing their value chains in India. That's the issue we have. Indian companies are being throttled to capital burn and supply chain cartel of the Chinese companies. That has happened in the past.
What is the way forward? It is very clear for us that India needs to change the mindset first. The biggest business of the country is the government. Government has to think that they are fully responsible for building the globally competent ecosystems and the firms belong to the government.
You have to change the measurement system to change the behavior, and change the mindset of people working the government so that they believe that their companies are theirs. They have to build companies to create finally, and to change the country from to migrate from the country and from poverty to wealth.
Secondly, Chinese companies and their supply chains, when they are coming, must follow the development agenda. Once they are following the development agenda, they must be given green carpet for companies bringing skills and fully aligned to follow the development agenda. To export from here, because the Taiwanese companies and Japanese companies went to China because they utilize the global capital of China and their human resources. They exported from China to the world.
We must also follow that, because our per capita is low. Once we are able to create skills, we will be the most competitive. Any company who's utilizing the India's labor and exporting out of India must be supported. Last the fiscal policies. We have to create the economies of scale through incentives and subsidies. We have to create the roadmap for globally competitive supply chain and for globally competent supply chain from India.
We have to utilize the domestic market. That's what the world has done. For Indian companies to build scale, we have to give them exclusive market access of roughly 20%. The market can enable scale for creating Indian champions or global Indian champions.
With this action, we will build the globally competitive supply chain in India in a very big way. Banking must follow the development into banks to have targets to build Indian champions. They have to follow the development agenda, and set targets to build globally comprehensive financial cost by subsidizing the cost of companies following the development agenda.