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Is India downloading the ‘6 killer Apps’?

02 May, 2013

In the book titled “Civilization: The West and the Rest” published a year ago, Niall Ferguson attributed the secular rise of the West across centuries to its ability to develop six killer concepts or ‘Apps’—”competition, science, the rule of law, medicine, consumerism and the work ethic”. Ferguson argued that ‘the Rest’ have now downloaded these killer Apps that the West once monopolised and hence are likely to drive the next wave of development.

At a time when India’s ability to develop on a sustainable basis is being questioned, an analysis of India’s progress on each of these parameters (or ‘killer Apps’) provides a useful framework for understanding why India should revert to a high-growth path. In particular, India’s undeniable superiority in ‘Competition’, ‘Consumerism’ and ‘Work Ethic’ is likely to result in India’s eventual reversion to high growth.

Killer App#1: Competition

According to Ferguson, Europe’s small and piratical states were able to build modern capitalism mainly owing to the spread and rise of competition. According to him, European decentralisation fostered the growth of political and economic competition, thereby giving way to the rise of a powerful nation-state and the unfettered rise of capitalism.

India’s progress on Competition: High 

Economically, the degree of competition in India underwent a structural up-shift in 1991 when India embraced the New Economic Policy, imbibing greater liberalisation, privatisation and globalisation. Besides economic competition, India is also characterised by meaningful competition in non-economic dimensions as well, including:

1. Politics – where regional parties are giving established national parties a run for their money and capturing greater vote share. 

2. Governance – where institutions such as the Competition Auditor General (CAG) or more recently the Central Bureau of Investigations (CBI) are emerging as a powerful counter-force to the Executive’s might. 

3. Markets – where some of the largest sectors such as FMCG as well as IT are characterised by meaningful competition. The Indian banking system is perhaps the only exception, as Indian banks have a near-monopoly over the supply of credit and hence are exposed to large risks (refer to our banks’ forensic piece: Click here for detailed note).

The recent fall from grace of Brazil’s largest companies highlight the limitations of a Chinese-style model of the state picking corporate winners as against an Indianstyle model based on competitive forces (FT article available).

Besides the long-term productivity gains that ‘competition’ yields, an economy characterised by competition in areas ranging from politics to economics is likely to generate far more sustainable growth than an economy that lacks the same. 

Killer App#2: Science

Ferguson reckons that whilst eastern Muslim powers slowed down scientific progress in their own region, the Christian West advanced militarily and academically.

India’s progress on Science: Low

India lacks science and technology as compared to peers, which can be attributed mainly to India’s capital-scarce nature and hence the minimal fund allocations made to research.

India’s limited development in science is reflected in the low research and development expenditure as a percentage of GDP undertaken by India. This metric was at 0.8% of GDP in India in 2007 as opposed to 1.4% in China and a global average of 2%. Consequently, India lags meaningfully in terms of the ultra-skilled manpower required for furthering the cause.

For instance, whilst Russia led the BRICs with 3,230 researchers/million people dedicated to research and development (R&D) in 2005, India’s corresponding figure was merely 135  researchers/million people. However, this number has been expanding in India whilst the same has been contracting in Russia over the past few years.

Killer App#3: Property Rights

Widespread land ownership, laws of private property and its ties to the democratic process gave the United States a more productive, stable footing than its neighbours to the south.

India’s progress on Property Rights: Moderate

India’s ultra democratic political system has led to a meaningful turbulence in the immediate term but historical evidence suggests that in the long term, inclusive political institutions are structurally more stable.

As regards property rights and legislations, whilst India has a fairly well-defined body of property rights, the bottleneck has been the judicial system which is slow and overburdened. However, in absolute terms, Country Policy and Institutional Assessment (CPIA) gives India a rating of 3.5 (where 1=low and 6=high) on ‘property rights and rule-based governance’ as opposed to the world score of 2.9, thereby corroborating India’s mildly above average standing on Property Rights as compared to the rest of the world.

Killer App#4: Medicine

The spread of modern medicine throughout colonial outposts (in Africa and elsewhere) doubled life expectancy with positive side effects for the broader economy.

India’s progress on Medicine: Moderate

Whilst life expectancy in India has increased by 7 years over the past two decades, life expectancy at birth in India currently stands at 65 years which lags high income nations’ life expectancy by 15 years. Whilst India’s health expenditure (as a percentage of GDP) at 4.1% is comparable to its other lower middle income peers, India lags the upper middle income country benchmark of 6.1%.

However, India’s vibrant generic pharmaceuticals sector and its patent regime that allots a higher weightage to social objectives, as evinced by the Indian Supreme Court’s recent refusal to uphold the patent on Gleevec, the blockbuster cancer drug points to the meaningful potential that modern medicine holds in India – a dynamic that several emerging markets may be deprived of owing to their stricter patenting regimes (see article).

Killer App#5: The Consumer Society

Ferguson highlights how shopping made the industrial revolution in the West, as the world experienced the magic of how ‘demand creates its own supply’. The twentieth century saw a new model of civilization focussed on consumerism and undeniably, consumerism has been the growth engine of some of the largest developed countries of today.

India’s progress on Consumerism: High

India’s raging current account deficit despite an economic slowdown owing to its insatiable demand for gold and oil is the most explicit indicator of India’s propensity to consume. Besides, the fact that ‘77% of Indian households own TVs and 82% own mobiles/telephones even as 37% of Indians are estimated to live below the poverty line’ points to the all-pervasiveness of consumerism in  India.

The strength and vigour of consumption of India has meant that this engine provides stability to India’s growth rate even when growth slows down. For instance, even as the cyclical slowdown in the white-collar job market over the past two years has led to a cyclical dip in automobile and durables’ sales, the relentless rise in blue-collar workers’ wages has lent resilience to entry-level

consumption items such as pressure cookers, soaps and hair oil (refer titled ‘Why are blue-collar wages rising relentlessly?’: Click here for detailed note). 

Killer App#6: The Work Ethic

Ferguson highlighted how for most of history, men had worked to live. But the Protestants lived to work. It was this work ethic that sociologists argue gave birth to modern capitalism.

India’s progress on Work Ethic: High

The average Indian’s scathing desire to progress was captured best by VS Naipaul’s ‘A million mutinies now’ where the author noted Indians’ scathing desire to prosper, a dynamic which had been unleashed by India’s independence from the British rule in the 1940s and perhaps boosted further through the competitionembracing reforms of 1991.

Whilst impossible to quantify, CIOs of global fund houses admit that the-first-tocome- into-office and the-last-to-leave-office invariably are Indians. Another anecdotal gauge that captures Indians’ genetic wiring in favour of hard work is perhaps the CFA pass rates. CFA pass rates are estimated to be one of the highest amongst Indians and Chinese, besides the fact that the average age of a CFA candidate in India is likely to be 10 years less that his/her Western counterpart. 

Conclusion

Our assessment suggests that India has downloaded 3 of Ferguson’s 6 killer Apps and the remaining 3 are currently being downloaded. In fact, the current slowdown can be attributed mainly to  India’s ultra competitive political framework whereby national parties are having to cede power to regional parties, Government watchdogs, investigation agencies the judiciary as well as regulators.

Despite the immediate-term negative consequences of this, India’s undeniable superiority as compared to most Emerging Market peers on ‘Competition’, ‘Consumerism’ and ‘Work Ethic’ is likely to result in India’s eventual reversion to high growth.

(Ritika Mankar Mukherjee is analyst with Ambit capital.)

To become a guest contributor with VCCircle, write to shrija@vccircle.com.


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Is India downloading the ‘6 killer Apps’?

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