India's hundredth birthday: Here's how it can power its multi-trillion dollar dream

When interglobe enterprises launched MOVIN Express—a B2B logistics JV with UPS—last May, J.B. Singh, Director of the company, did not expect it to be such a success. Singh, a veteran of the aviation and hospitality industries, attributes it to a mind shift happening across the world’s fifth-largest economy, where clients prefer to deal with structured, high-performance logistics players. “They want a process-driven environment, things to move on schedule, and high-performance teams to bring down costs and make things more efficient,” says Singh, during an interaction with BT in his sun-kissed office in Gurugram. MOVIN has expanded to 49 cities in Q3FY23 from 28 in Q2, nearly doubled its headcount to 800 personnel from 460, and currently reaches more than 3,000 pin codes in India.

In eastern India, regional carrier IndiaOne Air launched operations last August with two nine-seater Cessna Grand Caravan EX aircraft to underserved destinations such as the left-wing extremism-impacted Jeypore district in Odisha. The airline today covers eight destinations, and has consistently reported passenger load factors (occupied seats in aircraft) of over 90 per cent since inception, data from Directorate General of Civil Aviation (DGCA) shows. “If urbanisation in India has to rise to 50 per cent, and its GDP has to jump to $15-20 trillion over the next two decades, aviation has to become accessible to the people living in Tier II and III cities,” says Arun K. Singh, CEO of IndiaOne Air.

Down South, Chennai-based Srinath Ravichandran, with a Master’s in Aerospace Engineering from the University of Illinois, Urbana-Champaign, returned to India in 2017, intending to take spacetech to the masses. Bonding with Moin S.P.M. over games of backyard cricket, he co-founded AgniKul in 2017. In November 2021, AgniKul became not only the first spacetech player to successfully test a single-piece 3D-printed rocket engine, but also became the first Indian company to open a spaceport and mission control centre at the iconic Satish Dhawan Space Centre in Sriharikota. “This is the best time to launch a spacetech start-up in India. There is a clear business need, potential investors have realised its importance, and the government is willing to help,” says Ravichandran.

As India gears up to become an economic powerhouse, the above examples illustrate how the country’s business paradigm is transforming. In the post-pandemic period, India has not only managed to make a relatively quick recovery, but rising consumer demand has also managed to insulate it from the slowdown in most G20 economies. If the momentum is sustained, the country may touch GDP of $10 trillion by 2035, a study by the Centre of Economics and Business Research shows.

“India’s economy is likely to be the world’s third largest in dollar terms by the end of this decade,” says Sanjeev Sanyal, Member of the Economic Advisory Council of the Prime Minister. “Our per capita income will still be below that of western countries, but I feel that in 25 years we will have ended absolute poverty, become the top exporter of goods and services to the world, made the energy transition, and taken our rightful place on the UN Security Council.” Sanyal feels the country must continue to strive for the next cycle of reforms, particularly in administrative and judicial areas.

The last point is significant. Experts have continually urged for reforms in the bureaucratic and judicial processes to make India more lucrative. Before the World Bank discontinued its Ease of Doing Business rankings in 2021, the country stood at a lowly 163rd spot among 190 countries in contract enforcement. Deven R. Choksey, MD of KR Choksey Holdings, blames it on the old framework: “Bureaucrats end up amassing more powers through archaic laws and bring discredit to ease of doing business. While the government is trying to clean up the legal framework, the process is not moving at the desired rate.”

Moreover, in the event of a dispute between the central and state governments, infrastructure projects suffer long delays. “While the central government does the heavy lifting, state governments are often found lacking in their implementation,” says Choksey, adding that’s why results vary from one state to another. Take the case of the Mumbai-Ahmedabad High Speed Rail corridor that slowed down after the swearing-in of the former Uddhav Thackeray-led Maha Vikas Aghadi government. It may have jacked up the cost of the Rs 1.8-lakh crore project by a few thousand crores.

So, how will this relationship mature? “That is difficult to predict as these things evolve with the needs of the time,” says Sanyal. “A key issue will be the process of transferring resources to the third tier of government—municipalities and panchayats.” He sees this shift to grassroots as empowering development over the next 24 years.

The country’s famed resilience and the ability to leapfrog technologies are expected to support growth. For example, IMF has termed Direct Benefit Transfer—that transfers welfare money directly to bank accounts of beneficiaries—a “logistical marvel” given the country’s sheer size. “The systematic roll-out of digital infrastructure has not only resulted in increasing tax compliance, but also brought down the cost of goods and services. Positive developments on social infrastructure, the production-linked incentive (PLI) scheme, digital framework, 5G and Industry 4.0 are helping get investments to India despite several hurdles,” points out Choksey.

India is keen to harness Industry 4.0 to become a global manufacturing hub, with even PM Narendra Modi asserting that the country could lead the fourth industrial revolution. Anku Jain, MD (India) at Taiwanese fabless chip major MediaTek, sees this to be making Indian manufacturing smarter. “In a factory, the entire equipment, sensors and processes can be digitalised. If a machine has some issues, you can carry out preventive maintenance. Data provided by sensors to intelligent servers in the backend can be utilised to take appropriate action and improve the efficiency of the process,” he says.

Meanwhile, India itself is looking to become a chipset manufacturing hub. Last September, the government announced amendments to its Rs 76,000-crore PLI scheme for semiconductor and display manufacturing by offering to reimburse 50 per cent of the project cost across categories. Despite concerns over the lack of a large volume of ultra-high-purity water, uninterrupted electricity and sites for disposal of hazardous waste, Jain expects the initiative to start yielding results in the next couple of years. “By successfully setting up a strong chipset ecosystem, India will be able to derive significant business and strategic gains.” The 5G rollout that commenced last year will also play an important role. Its high speed, low latency and reliability in delivering seamless communication will result in the generation of high-quality videos on the fly, which will aid remote healthcare and drone surveillance in sectors such as agri and mining. “More importantly, 5G will play an important role in taking high-speed internet to the masses beyond Tier I cities,” says Jain.

Meanwhile, the intensifying chorus on green financing and sustainability has jolted Indian corporates into a new reality over the past few years. The result: Buzzing activity around the adoption of environment, social and governance (ESG) principles. “Three years ago, it was a buzzword. Now, every firm wants to get materiality assessments done,” says Priyanka Dhingra, ESG Analyst at SBI Mutual Fund. Adds Anil Choudhary, Head of ESG and Climate Change at PE firm True North: “In 2018-19, most of our investee firms were asking ‘why’. Now it’s ‘how’ to integrate ESG in their businesses.” Significantly, the end of FY23 will see the top 1,000 listed Indian firms disclose their ESG journey publicly for the first time as per Sebi’s mandatory Business Responsibility & Sustainability Reporting rules.

Of ESG’s three pillars, ‘E’ is where most of the activity is happening. Climate change, particularly, is the big focus. Studies show that of the $400 trillion capital available globally, about $130 trillion is owned by signatories to the UN Principles of Responsible Investing (UNPRI). “That means those funds won’t invest in fossil fuel companies and will withdraw from weak ESG firms. That’s the first pressure corporates are responding to,” says Sambitosh Mohapatra, Partner and Leader of ESG at PwC India. True North’s Choudhary says PE investors used to ask whether the firm has an ESG policy. “Now they ask: How do you govern your ESG policy? How is the head of your organisation committed to it? How often do you meet?”

At 2.9 billion tonnes, India is the world’s third-largest carbon emitter annually, although our per capita emissions are lower than other major economies. We have pledged to become net carbon-neutral by 2070. The goal requires $17.77 trillion by 2070, according to a Standard Chartered study. “A lot of money is going to come into developing countries. India has to be ready because multilateral agencies will have structures about how to disburse the money,” says Preeta Misra, Senior Director – Credibility & Business Insights Group, ESG and SME, Dun & Bradstreet India. Experts say most of the urgency for India Inc. is driven by risk-mitigation strategies, but value creation potential will also drive their adoption. Studies show that six sectors—power, steel, automotive, aviation, cement and agriculture—account for about 70 per cent of India’s CO2 emissions. They face the maximum pressure, experts say.

Let’s take cement. JSW Cement’s EVP and Chief Sustainability & Innovation Officer Manoj Rustagi says 30 per cent of the carbon emission in an integrated cement plant comes from the use of fossil fuels and 10 per cent is from electrical energy use. “But 60 per cent is due to the inherent cement-making process of breaking down limestone (calcium carbonate) into calcium oxide and CO2.” He says cement companies are working to cut down the first two, but the third one requires carbon capture, utilisation & storage (CCUS)—a suite of technologies to remove carbon from the atmosphere and lock it back into the earth.

Other sectors such as oil & gas, steel, energy and chemicals will also need CCUS for India to truly become carbon net-zero. A developing nation like India needs these very sectors to fire, in order to become a $5-10-trillion (or a $26-trillion, per EY’s estimates) economy over the next few decades. “Our resource requirement will only go up till we reach the peak. So, most companies are focussing on reducing the intensity of CO2 emissions,” says Dhingra. “If you produce a tonne of cement and it emits 500 units of carbon, your trajectory will be to reduce that emission year-on-year through energy efficiency.” Having that plan in place is critical.

The recently announced National Green Hydrogen Mission envisions India as one of the global hubs for making the alternate fuel. Says Minister for Petroleum and Natural Gas Hardeep Singh Puri: “What you are dealing with is not an idea whose time has come, but an idea that has already translated into a national project.” But industrial plants typically operate for 30-40 years before they have to be phased out. Adopting alternative fuels will require substantial and expensive re-engineering of machines and processes. “A lot of capacity addition is yet to happen in India unlike in the US or Europe. It’s an opportunity to design plants with a lower carbon footprint from the get go,” says Rustagi. For a nation that imports over 85 per cent of its energy requirements every year but is rich in renewable energy sources, “the risk of climate change is indeed a huge opportunity”, says Choudhary.

A part from ushering in billions of dollars of capital and solving complex problems innovatively, Indian start-ups have another claim to fame—the creation of a new kind of gig economy. In a nation with a nearly 500 million-strong but largely unskilled workforce, the rise of the likes of Ola, Zomato, bigbasket and other quick-commerce firms have brought forth this new category of formal workers. “Start-ups are creating a workforce that will be India’s competitive edge in the future. How we leverage this workforce and what opportunities they can create for India 10-20 years from now, we don’t have all the answers yet,” says Matrix Partners’ India MD, Rajinder Balaraman.

While studies show VC-funded start-ups play a huge role in GDP contribution right from day one, their contribution to employment comes a little later, says Ventureast Founder and Managing Partner Sarath Naru: “Beyond the first 5-10 years of their life, start-ups start creating a large number of jobs at a lower level, which is needed.” NITI Aayog estimates India has 7.7 million gig workers, which it expects will swell to 23.5 million by 2029-30. A recent report by consulting firm BCG estimates India’s gig workforce in the non-farm economy will balloon to 90 million over the long term.

Another significant impact they are expected to have is in India’s transition to an organised market. Start-ups have managed the feat even in infrastructure-heavy capital-asset businesses such as buses and budget hotels. Karthik Reddy, Managing Partner of Blume Ventures, says it’s because of their tech-first problem-solving approach: “They are not constrained by capex or legacy ways of thinking about business.”

Their ripples will be felt across the country as new start-ups come from beyond the metros, such as Bihar’s agritech start-up DeHaat, says Samir Sheth, Partner & Head-Deal Advisory Services, BDO India. “Talent and real estate costs are more competitive in these places and make the ventures cost-effective.” Balaraman looks at this as redistribution of access. “Many of our investments are now focussing on the next 50-100 million digital consumers, too. That access creates opportunity, which creates wealth.”

But before start-ups can take on the starring role being written for them in India’s journey of growing into a $5-trillion economy and beyond, investors say they must learn to turn profitable quickly as early-stage capital is limited. In the decade since the boom kick-started it all, the world’s third-largest start-up ecosystem is home to 100-odd unicorns. A cumulative $180 billion start-up funding will have flown in by 2023. But there are just 20-30 great examples of profitable start-ups. Says Reddy: “The appetite for funding a futuristic dream without any sustainability is limited. The setback in the current market is a signal of that.”

W ith its long-term employment generation capacity at scale for low-skilled labourers, ability to substitute imports, fulfil consumption demand created by a flourishing services sector, as well as leverage the China+1 opportunity, a services-oriented India needs to boost its manufacturing MSMEs. India’s estimated 64 million MSMEs account for a third of the GDP of $3.5 trillion and create 120 million jobs. But more than 80 per cent of the MSMEs play is in the services sector; manufacturing MSMEs account for less than 20 per cent. Newer MSMEs are coming up in the services sector and IT/ITeS is the most attractive sub-sector, says CII National MSME Council Co-Chair K. Nandakumar. “MSME entrepreneurs are anxious whether they will succeed in manufacturing. They prefer to set up services ventures where the risks are lower. If India has to leverage the China+1 strategy as global supply chains get realigned, we have to aggressively focus on manufacturing.”

Although manufacturing needs an extra push, the overall MSME contribution to India’s GDP has also stagnated at 30 per cent for the past decade. The government wants to grow the GDP from the current $3.5 trillion to $5 trillion by 2024-25 with 50 per cent share from MSMEs. That means MSMEs alone have to add 75 per cent of the incremental GDP over the next few years, says Arun Singh, Global Chief Economist at Dun & Bradstreet. That’s a challenge on two major counts—finance and market access. Only 16 per cent of MSMEs’ credit needs are met by formal sources, International Finance Corporation data shows. They mostly turn to their friends or loan sharks who charge very high interest rates. “The first challenge is to transition MSME credit from informal to formal sources of finance,” says SIDBI Chairman S. Ramann. But he sees the situation improving with fintechs offering secured and unsecured loans, and banks and financial institutions improving their underwriting with digital processes.

With ESG adherence becoming a crucial part of tapping into global markets, MSMEs have another cost coming their way. But failing to adhere will be a bigger opportunity cost, says Dun & Bradstreet’s Singh. “No matter how cost-effective or good your products are, global counterparts will have a restriction in engaging with companies whose MSMEs are not ESG compliant.” Meanwhile, firms like MOVIN Express are already prepping for the potentially huge opportunity to be generated by the expanding MSME sector in the country.

“We are working with all enterprise customers, but it is the MSME market that will grow well. The MSMEs are lean, efficient and agile. And given the right sort of access to capital and infra, they can outperform,” says MOVIN’s Singh.

In the current swirl being witnessed in the economy, the decisions made today will determine the road to 2047. Or as our ancient texts inform us, it takes considerable churning of an ocean to produce amrit or nectar. This time, it’s an ocean of possibilities that require intense churning to discover the amrit of future opportunities.

@manishpant22, @SaysVidya