Whilst average GDP growth in India increased by 1.3x over FY09-13 compared with a decade ago, India’s less celebrated states of Uttar Pradesh (UP) and Uttarakhand delivered an increment of 1.9x and 1.8x, respectively, over the same period. To be more specific, over the last five years UP and Uttarakhand have grown at an impressive 6.7% and 10.6% per annum, respectively (in real terms).
What makes this growth pickup all the more interesting is the fact that this performance was not driven by any dramatic change in the regional political leadership (as has been the case in Gujarat and Bihar). So how have these states surged ahead and what implications does that have for the rest of the country? This column contains some of my observations from a recent trip to the interiors of these states.
Driver 1 - The relentless rise in blue-collar wages: Across the country blue-collar wages—for skilled and unskilled labour and for urban and rural labour—have grown at 15-20% per annum (in nominal terms) over the past five years. This seems to have happened due to a combination of: (1) high growth in the traditional labour-supplier states such as Bihar as well as (2) a rising demand for education in India’s labour class. Therefore, I was not surprised when many of the industrialists I met in UP and Uttarakhand also complained of a shortage of skilled as well as unskilled labour. This surge in wages, combined with land price appreciation (see below), is driving consumption, and in turn economic growth, in these states.
Drive 2 - The surge in land prices: As was the case with most of India’s metropolitan cities, the go-go years of 2004-08 triggered a real estate boom in Delhi. The steep rise in real estate prices in the Indian capital over this period forced the city to grow laterally in the subsequent years. As Delhi attracted more migrants and as migrants demanded more affordable accommodation, the national capital region (i.e. the area surrounding Delhi) began to experience large-scale residential construction activity which continues to this day.
Whilst industrialists blame this dynamic for absorbing a large number of labourers, the result of this wave of construction activity was the creation of captive demand for input-providing industries such as cement and specialised iron rods used for construction. For instance, I met a host of small- to mid-sized industrialists from Muzaffarnagar (in UP) who have emerged as owners of multi-million dollar conglomerates due to the manufacturing of these specialised rods.
Whilst the construction and real estate boom has been more profound in UP, parts of Uttarakhand have also experienced land price appreciation in the region of 10-20x over the past five years, owing to the tax exemptions offered to industries until end-FY10. Uttarakhand government offered large-scale tax exemptions to industries immediately after its formation in the early noughties. These exemptions led to an influx of corporates keen to set up units in the region. The rising demand for space in a land-locked state like Uttarakhand drove an exponential rise in land prices in pockets, thereby generating powerful wealth effects for land owners.
A negative byproduct of this sharp rise in land prices has been that the local mafia (with the backing of local politicians) both in UP and Uttarakhand has become intensely involved in real estate. The most common mafia involvement in the sector is ’intermediation‘ wherein the mafia purchases the land from farmers (using coercive measures) and then sells it to real estate developers or local businessmen at 10-20x the purchase price. Then to ‘launder’ the profits created by this coercive intermediation, the mafia invests in hotels or shopping malls which in turn further fuels the construction boom in these states.
Driver 3 - The jump in consumers’ aspirations: Beyond the rise in incomes and land-related wealth, consumers’ aspirations have changed dramatically over the past decade. Towns like Meerut and Dehradun are not just self-evidently more prosperous than they were 20 years ago, the lifestyles of the people here have also changed. From the clothes that they wear, to their high uptake of education to the swish shopping malls that they spend their weekends in, life in these places is not that different any more from life in Mumbai, Bangalore or Delhi.
The general prosperity in Uttarakhand as well as parts of UP is visible, as also corroborated by the 2011 census which points to over 60% penetration of mobile phones, significantly greater than the national average.
Why does this matter? The fact that growth in these states have surged without enlightened political leadership and in the face of chronic power shortages (no power for half the day is common), labour shortages and law and order issues carries an important message for investors. It tells us that whilst positive government intervention can lift growth rates in India even higher, the scale of opportunities in the country is so great that even without enlightened leadership we can grow at 6-7% per annum. That in turn should prompt us to view the overall stock market, and particularly the better small-mid cap companies, in a much more positive light than has been the case over the last couple of years.
(Saurabh Mukherjea is CEO, Institutional Equities, at Ambit Capital. The views expressed here are his own and not Ambit Capital’s.)
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