This write-up deals with a topic that has received a lot of attention of
the economic thinkers, researchers and students in economics in recent
years. The study of comparative economics provides us with some
interesting facts that reflect not only the present status of the
economies, but also provides insights about how they would look
several years from today. In the presentation today, I will quote
illustrative data about the US and Indian economies to depict pictures
of similarities and differences between them. The figures that I would
liberally quote may not be exact, but I am sure that they are reasonably
correct. In this context, I will talk about per capita incomes, sizes of
companies, the culture of credit or of borrowing, small businesses and
a host of other topics within the broad field of economics. You may
have heard or read a lot about the high-tech industry in the US,
especially during the recent years. Though, I will mention the high
tech industry, my focus will not be on that alone. I work in the field of
marketing in a financial services company and thus you will see a
focus on finances and matters related to money.
Relative sizes of the two economies
The US GDP (Gross Domestic Product) is nearly $10,000 billions ($B)
while that of India is only $400B at nominal prices and $1,500B when
purchasing power parity (PPP) is considered. In PPP terms, China is
the second largest economy with nearly $5,000B of GDP. Japan
comes next with a GDP of $4,500B followed by Germany ($2,200B).
However, when you look at per capita incomes, the story is quite
different. The citizens of developed countries enjoy per capita
incomes that are many times those of their unfortunate counterparts in
the developing countries. Per person income in the US per year is over
$30,000 while that of an Indian is about $400 or less than Rs. 20,000.
The average price of a car in the US is about $20,000 or slightly over
Rs 900,000. In India, low-end Marutis sell for about Rs. 240,000. I
am giving you the approximate prices in the two countries. Now, you
see the reason why cars are still unaffordable to the vast majority of
Indians while they are highly so to an American. Yes, it is true that
Indians are buying cars in ever-larger numbers. But, when you
compare with developed countries, car ownership as a percent of the
population is still extremely low. In India, the car sales during the last
three years have been about 550,000 per year. But, please do not jump
out of your seat if I tell you that sale of cars in the US averages about
18,000,000 a year – about 30 times in India. Yes, the car sales are that
high. The sales of trucks in India are about 125,000 a year – in the US
they are nearly 2,000,000 per year, about 16 times. The per capita
differences are several times higher since the population of the US at
290 millions is less than a 1/3rd of India's. Of course, India has made
a lot of strides during the recent past. It started with the liberalization
of the economy in 1991. However, she has a long way to go.
Though, the average price of a car seems higher in the US, they are
generally roomier than the cars sold in India. However, sizes of cars
sold in India compare much more favorably with those sold in Japan,
Korea and Europe. In this respect, the US is an aberration. Since,
parking is not much of a problem in the US, except in large cities,
Americans prefer large cars. But, I am trying to make a different point
here. An average American can buy a car with about 8 months of his
annual pay while an average Indian even now needs to save for 12
years (the average income, according to Malayalam Manoroma is less
than Rs. 20,000). There lies the big difference. Cars is the US are lot
more affordable to its residents. That is why they can buy cars in such
large numbers.
Prices of cars and average incomes in India and the US*
-------------------------------------------------------------
Price of a Average # of years to
car per capita work to buy a
income car
----------------------------------------------------------
India Rs. 240,000 Rs. 20,000 12 years
US Rs. 900,000 Rs.1,350,000 8 months
($20,000) ($30,000)
-----------------------------------------------------------
To give you other examples, an American can buy a small TV, priced
at $150 with less than two day's pay. She can buy a 2-liter bottle of
Coca-Cola at about $1 with less than what she earns by working just
10 minutes. In India, at Rs. 42, for the same two-liter bottle, an
average citizen has to work for several hours.
I just read that the number of motorcycles sold in India last year was
3,900,000. Now, that is a very respectable number. I do not have
comparative figures for the US – but I will guess that the sales of
motorcycles there will be less than a million units per year. In that
country, motorcycles are used for fun and not for real commuting.
During the summer months, on days when the temperature goes to
300C or higher, Americans like to take rides on their bikes, as they call
them. If you drive along highways on such warm days, often you will
see groups of both men and women taking pleasure rides on their
bikes. On a few occasions, I have seen thousands of bikers all riding
closely together. Many of these motorcycle enthusiasts are hippies or
their variants and they are just enjoying the warm summer days of
which there is a short supply in most parts of that country.
Growth rates of economies
My readings suggest that the Indian GDP has been growing at a
healthy clip of 6.0% to 6.5% over the last several years. This
compares quite favorably with the growth rate of 2.0% to 2.5%
experienced by the US in a typical year. China has, however, done
even better than India with a pace of growth of 8% to 9% annually.
Let's pause for a minute and try to understand the impact of these
different growth rates. As I mentioned earlier, the Indian economy in
PPP terms is about $1,500B while the US GDP stands at $10,000B or
$1 trillion. As far as the US is concerned, you should note that there is
no difference between the PPP and nominal GDP since both are
measured in the same currency, i.e., the dollar. Given the growth rates
that I cited, the Chinese economy would still be smaller that of the US
in another ten years, but by only a small margin ($11,837B for China
versus $13,439 for the US). If it can continue with the momentum and
keep growing at the same pace, in another twenty years it will be the
biggest economy in the world – it will dwarf the US with a size of the
economy that will be at least 1.5 times of the former!
China is currently on the throes of becoming a superpower in terms of
size of its overall economy. By all historical accounts it was a
superpower till the 17th century when the ascent of the western
economies took off at the dawn of the industrial revolution and with
the conquests of vast regions of the world by these countries as
colonies or vassal states. China is all set to regain its glorious status of
the distant past barring any cataclysmic events like a devastating
earthquake or a destructive nuclear war with the US over the control of
Taiwan.
Comparative GDPs of India, China and the US 10 and 20 years from today.
----------------------------------------------------------------------
Current GDP CAGR GDP in GDP in
($B) 10 years 20 years
-------------------------------------------------------------------- ($B) ($B)
India $1,500 6% $2,686 $4,811
China $5,000 9% $11,837 $28,022
US $10,000 3% $13,439 $18,061
----------------------------------------------------------------------
But, India does not do as well by my calculations. At a 6% annual
growth rate, the Indian economy will grow from its current size, which
is 1/7th of that of the US to 1/5th in ten years and 1/4rd in twenty
years.
Do you see how much of a difference a mere 3% growth rate makes
when compounded over a long horizon? So, what do you think India
ought to do to become a world power in 10 or 20 years? You guessed it
right; though 6% CAGR (compounded annual growth rates) is highly
respectable, it is not nearly enough. Our motherland has to strive to
expand her economy at an annual rate of 9% or 10%, and maybe even
higher. That perhaps is an arduous task, but definitely not an
impossible one. China has achieved such a high growth rate during the
recent past, and the so-called Asian Tigers like South Korea expanded
at even higher CAGRs during the 1980s and the first half of the 1990s.
But, the policy makers at the helm of the government ministries and
the Reserve Bank of India need to be extra careful. Such a high rate of
expansion may lead to an overheating of the economy and a high rate
of inflation. Monetary and fiscal policies will need to be coordinated
well – the massive budget deficit of 10% or higher that we see now
will have to cut to more reasonable levels. Even having a disciplined
monetary and fiscal policy will not be sufficient – fundamental
changes to the judicial and social systems have to boldly brought about
for this to happen during our lifetimes.
Relative sizes of companies in the two countries
Do you know which is the largest company in the US and how does it
compare with the largest firm in India in terms of revenues? Do you
know if this largest US company is a high-tech company, a bank, a
wholesaler, a retailer or a pharmaceutical company?
Wal-Mart, a retailer-cum-wholesaler is the largest company in the US.
In fact, it is the largest firm in the world with an annual sales of $240B
or Rs. 1,080,000 crores. Daily sales of Wal-Mart on certain good days
- like the black Friday, the day after Thanksgiving celebration in
November when throngs of shoppers make runs on retail stores to buy
all they can lay their hands on for Christmas and New Year's gifts
exceeds $1.5B or Rs. 6,750 crores. On the Indian side, the firm with
the largest sales in 2002 was Reliance with Rs. 58,000 crores of
revenues. This amounts to only $13B. Thus, Reliance is only 1/18th
the size of Wal-Mart. Do you see the large difference in scale?
Wal-Mart has about 2,200 stores in the US and a few hundred more in
countries like the UK, Germany and now even China. It has not
entered India yet to open its outlet, but I am sure it is starting to eye
India with increasing inquisitiveness. Each of its 2,200 stores is as
large as two or three football fields. In most of these stores, you can
buy everything from potatoes, onions and milk to medicines to TVs to
clothes under the immense expanse of the retail floor with rows upon
rows of goods from all over the world. Each store is like a decent size
Indian bazaar, except that there are no walls that separate the stores
within. These stores normally look like big boxes – there are doors in
the front for shoppers to enter and leave with the big bags stuffed with
goods of their liking. The back doors are used by the suppliers and
employees. There are no windows on any of the sides – but because
there is air-conditioning and adequate lighting all the time, a shopper
does not feel that he is inside a big box. Companies with stores of this
type, which are also referred to as category killers in marketing
parlance, offer goods at low prices since they wield enormous power
with vendors. Wal-Mart, for example, scours the world, including
India to get its products at the best price.
Can you guess which is the foreign country from which Wal-Mart
imports the products that it offers for sales at prices that most other
stores find it utterly difficult to compete against? Many of you may
have guessed it right – it gets $15B of products from China every year.
The US imports over $150B of goods from China and Wal-Mart by
itself accounts for about 1/10th of this huge trade activity. This
company alone accounts for over 2% of the US GDP. Wal-Mart is not
a high technology or computer company in the sense that its focus is
not on producing or marketing or selling high tech goods. It, however,
has an extremely sophisticated computer based inventory control
system, which helps it lower cost to a bare minimum. The computer
system enables it to send particular goods to its stores from its many
warehouses using its huge fleet of trucks as and when there is an
anticipated demand for them. The system automatically sends orders to
vendors based on forecasted demand and the stocks at hand. No other
retail network in the US has come closer to the level of perfection that
Wal-Mart has achieved through this smart computer based control of
its inventory. Do not forget that the US is a large country with a
geographic size that will be nearly three times that of India and
supplying all of its 2,000 odd stores with goods in an optimal way is a
stupendous task.
The next largest companies in the US in terms of sales are car
manufacturers like General Motors and Ford, followed by petroleum
refiners and marketers like Exxon. The largest high-tech company is
IBM with annual sales of $70B. Microsoft, of which you hear so much
in the media, has sales of no more than $35B. The picture is somewhat
different when you look at profits and market values of companies - a
few high-tech companies like Microsoft, Intel and Cisco fare very well
against their old-world counterparts on these measures.
Small business and entrepreneurship
In both India and the US, small businesses employ bulk of the
workforce. In the US, there are about 2,500,000 small businesses that
employ two or more individuals. On the other hand, there are only
5,000 odd companies that trade on the stock markets. (If you include 1-
person enterprises like Amway and Mary Kay salesperson, the number
of businesses will be several times higher than the 2.5 million.)
Though, the US went through a recession recently and the largest firms
laid off a lot of employees during its wake, small businesses, in
general, have continued to grow both in their numbers and the size of
the workforce.
But, the above statistics should not lull you into thinking that all small
businesses that are started in the US ultimately survive and do well.
That is absolutely wrong. In my work at Merrill Lynch, we are
increasingly dealing with small businesses. Such small businesses are
prone to high failure rates even in the US. Only 1 in 5 or 6 businesses
that are started ever survive.
I would assume that the number of small businesses in India is a lot
higher than in the US. The failure rate among these small firms will be
also as high as that in the US or even higher. Stores in India tend to be
so much smaller and independent as opposed to being parts of chains.
A Wal-Mart may be equivalent to 100 or more typical Indian stores.
There are many other companies with stores that are comparable to
Wal-Mart in size though their total annual revenues may be lower.
There is a chain of hardware stores called Home Depot whose stores
that are equally big. Home Depots carry not only nails, screws, bricks
and hammers – but also lawn mowers, air conditioners, refrigerators
and even small homes or sheds. If you order an 8'X10' shed for your
backyard, its crew can come and install it for you in the next few days.
There are some groups of Indians who are doing quite well in business
in the US. One such group is Gujratis – especially those with the last
name of Patels. These Indians own nearly 50% of the 35,000–40,000
small hotels in that country. Such hotels are officially called motels – a
word that is a cross between motorcars and hotels. They are located
along the highways and their main arteries. Travelers of all kinds, but
mostly those who are driving to somewhat distant places in their
motorcars stay in them during nights. The entire family of the Gujrati
owner, including the wife, children, and often, elderly parents work in
them. The US-born children of these owners are now expanding their
parents' businesses by buying larger hotels like Holiday Inns and
Radissons, thus moving up the food chain.
Millionaire next door
A few years ago, a popular book on the wealthy households in the US
was published in that country. In that book called, "Millionaire Next
Door", the authors, two professors at business schools, found through
their research that there were 4,5000,000 households with net worth of
a million dollars or more each. Net worth is the difference between the
value of properties that a household owns and the loans that are
outstanding. A million dollars at the current exchange rate is about Rs.
4.6 crores.
The gist of their research is that over 70% of those who have made in
the US, i.e., are millionaires, have become so through founding of
successful businesses. The rest 30% have become rich through their
jobs or through inheritance. These 70% rich business owners do not
often own high profile or even interesting businesses. They own
hardware stores, laundromats or dry-cleaning stores, small electrical
stores, businesses that clean peoples' gutters, paint homes, perform
maintenance of machines and repair broken roofs. These millionaire
business owners tend to be spendthrift and live in smaller houses than
they can afford; buy cheaper cars than they can buy with the money
they have. That is why Professor Stanley refers to them as
'millionaires next door' – that is, you can't figure out that they are that
wealthy just by looking at their homes and cars. On the other hand, the
professor says that there are many high-income lawyers and doctors,
(who can also be considered to be independent businessman,) who buy
expensive cars and huge homes with jumbo loans and have to struggle
to pay those loans back. They are not millionaires when you subtract
the outstanding value of their loans from the value of the assets that
they possess.
I have read this book more than once. It is a very interesting book.
What impressed me the most is that many of those interviewed for the
book say that they had to struggle in the beginning. In many instances,
their first or even second attempts at business building failed. But they
persisted and with some luck they thrived. There is an important
lesson for Indians and Assamese from this book. Entrepreneurship
pays in the long run. But do not be assured of success right at the
outset – you will have to struggle for sometime.
Culture of borrowing
Over 90% of Americans borrow from banks to buy their cars and build
their homes. This helps them own homes when they are in their 30s
and 40s, instead of having to wait till their retirement to enjoy them.
This leads to an expansion of the economy – the ample use of credit
enables millions of families who otherwise can not buy a car or a
home, to get a piece of the American dream. Someone has to produce
these cars and build those homes. The multiplier effect that one learns
in a basic microeconomic class causes the economy to expand when
consumers purchase using borrowed money. This is an important
reason why 18 million cars sell annually in that country. I would
hazard a guess and say that car sales would not have exceeded 6 or 8
millions per year if American were to pay cash to acquire them. Home
sales will also be a lot fewer than what they are now.
Almost every adult American owns 3 or 4 credit cards. When they go
to stores to buy expensive goods, most often they do not carry bundles
of cash in their pockets. Only people, I know who carry wads of dollar
bills in their pockets are thieves and drug dealers who have difficulty
converting their illicit monies into bank deposits. A regular shopper
buys goods with one of their plastics and pay later when the credit card
company sends them the bills. This helps make life convenient. Banks
earn interest on balances.
It is good to see that the concept of borrowing is starting to take roots
here as well. Credit culture is good for the economy – but one should
not borrow beyond his means and become a slave of banks.
Not everything is fine and dandy
I have given you only the rosy side of the American story so far.
However, there are pitfalls in every good thing that ever happens. An
average American faces a lot more tension in life than his or her
counterpart in India. There are several reasons for that.
First, American have to work a lot harder than most Indians do. An
average American spends about 40 hours a week at work, but there are
many those who work 50, 60 or 70-hour workweeks. In India, most
employees do not work seriously for 30 hours per week. The number
of vacation days that employees in most US companies get is no more
than two weeks per year. In India / Assam most employees get at least
30 days of personal leave. In addition to the vacation days, there are
only 8 holidays during the year like the Independence Day on July 4th
and the New Year's Day. In India, the number of holidays runs in to
nearly 30 more days.
Secondly, it is extremely expensive to hire household help. In India,
those who have the means get others to cook, clean and wash for them.
In that country, most people do all of these on their own. Not even
dollar millionaires afford to hire help regularly. Of course, machines
help them with cleaning and washing – but still all of these take time
and could be physically tiring.
Thirdly, one big difference between firms in India and the US is that
the latter are ready to quickly shed jobs when the economic times
become hard and when profitability is at stake. These are precisely the
times when it is difficult for an individual to quickly land another
equivalent job. All of these factors create tensions in the lives of the
people. Since Americans tend to buy their cars and homes against
loans, hard times may lead to confiscation of these properties.
Conclusion and lessons for Assam / India
First of all, having studied in both India and the US, I can confidently
say that there is absolutely no difference in the intellectual capacities
of students here in Assam / India and the US. In fact, it would not be
wrong to say that better schools like the Cotton College compare quite
favorably with any school in that country. Now, if there is no
difference in intellectual capacities, how does one explain the
economic status of the two nations? The answer to lack of Assam's /
India's progress lies in the poor judicial and social systems that are
prevalent in the country together with pitiable conditions of the
infrastructure.
I understand that the state is facing huge budget deficits, but there is no
alternative to developing the infrastructure. Roads need to be
improved, electricity needs to be produced and distributed, and phone
lines need to be connected. And above all, the rule of the law has to be
respected and enforced. The right to property has to be respected and
upheld in courts. Patent laws need to be abided by and the crooks who
copy other people's ideas and technology without paying royalties
need to be put behind bars for creativity to flourish. If these basic
issues are taken care of, development will follow. Why can the central
government with a standing army of several millions strong utilize
them during long periods of peace to build the country's infrastructure?
My readings say that when the US built its highway system back in the
50s, military had a big role to play. India can do the same now 50
years later.
For Assam's economy to grow, there is no alternative to developing
more industries both large and small. The theory of comparative
advantage suggests that Assam should focus on areas that it could do
well like agro-based industries, petroleum-based industries and
tourism. Many of the sick industries run by the government needs to
be privatized for them to become healthy again.
- Contributed by Jukti Kalita, NJ, USA. This is the text of a
lecture given by Mr Kalita at Cotton College on November 7,
2003.
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