07th April – Time to read article – text 10 min, video 43 minutes.

• Today the Indian markets fell sharply, up to 5%, but lets look at this event in the global context.
• I came across this wonderful video by Ray Dalio recently, (43 minutes) and this helps us put the current market scenario in context.

My lessons from this video:

• The USA is in a down cycle and is showing the classic signs of this – more expenditure than revenue, high and rising debt, signs of domestic unrest and discomfort, and now this big one, new tariffs that are trying to curb imports and hopefully boost domestic production.
• China has been rising for long in trade and defense, with strong manufacturing, and till now was a big exporter to USA and ran a massive trade surplus.
• As USA fights China in the trade war, there may be bumps here, but this is a period of transition as China finds other markets and continues its rise.
• In an era of extended cold wars (USA-Russia) and nuclear powered countries, my expectation is that modern transition of Big Cycles will happen in the form of Trade wars and slow stagflation of economies.
• One example here is of Japan, which was a rising economic power till the 1980s, and could not sustain the rise, but has preserved its economy, and GDP has grown at about 1-2% p.a for 2-3 decades

So where is India and what is India’s play?

• China is a manufacturing giant, making products in high volumes, from metal – steel and aluminium, to cars, EVs, toys, furniture, ships, trains, etc.
• India’s play is in services –
  • Indian IT services industry is a miracle, with customers in over 150 countries. It gained momentum in the 1990s, and is today a massive industry commanding 50% of the global outsourced IT services market.
  • The second generation of Outsourced services has already rolled out – consisting of – Engineering services, contract medical & pharma services and Knowledge Process Outsourcing.
  • Global Competency Centers (GCCs) of many MNCs present in India also provide additional services like Marketing, Legal, HR, transaction processing, Finance and Accounts, etc.
• The following Services sectors must learn from the Indian IT services giants and look at the global market potential:
  • Banking, Financial Services and Insurance – We have yet to see Indian BFSI firms grow aggressively abroad and establish a global brand. Given the domestic strengths and penetration, this is possible.
  • Hotel Chains – not just Taj hotels, but also Oberoi, ITC, Leela, etc. can also expand globally.
  • Education – Indians spend $60 billion (₹5.1 lakh cr.) per year on education abroad, mostly graduation and post grad degrees. This is 4X the entire GoI annual education budget. Quality education should be available more easily domestically, at a fraction of the cost in USA, UK or Australia. This will save outflows, and can even earn inflows.
  • Tourism – If packaged well, tourism to India can attract large numbers. The Himalayas in Kashmir, HP and Arunachal, the Goan and Kerala beaches, the Taj Mahal, historic forts and monuments, food and rich culture, etc. can draw in millions for the exotic Indian holiday.
  • Healthcare – the opportunity exists not just for domestic services, but medical tourism in India, and also hospital chains in the developed world, where there is a shortage. Yoga and Ayurveda are traditional Indian healthcare systems already admired globally.
  • Telecom – Bharti Airtel ventured successfully to Africa, the next stage is a global brand, and even other companies can roll out the India success model.
  • Aviation – Indigo & Air India have the opportunity to grow globally, building on the India base.
  • Retailing – the success by Reliance Retail, Zudio (Trent) and DMart can expand globally. Titan with Tanishq can also be in this category.
  • Food services – the Jubilant Foodworks franchise in India is a scalable QSR model, and Indian chains can expand abroad. Saravanaa Bhavan has expanded into several countries. Indian food is popular internationally, so there is a demand that can be tapped.
  • Infrastructure services – firms like L&T already have global footprints, and other firms with a good domestic projects roster can grow internationally.
  • Logistics – as India itself improves its infra, expands domestic capacities and cuts the costs of logistics, opportunities exist globally in Ports, Shipping and Railway services, where we can deliver projects to friendly nations through GoI.
  • Shipping – Indian shipmen dominate global merchant navies & shipping. India’s coastline stretches for 7,500 km. But how big is the Indian merchant shipping industry? There is massive potential here.

How can this play in Services be accelerated?

• The need is for Industry focused colleges, universities and education, practical training with industry participation, and for skills development of the students at scale.
• GoI should provide Plug and play industry infrastructure – Offices and Factory parks, ready with connections of water, electricity, road connectivity access and ready to occupy workspace.
• Focus on growth in Tier 2 cities and towns by Govt. and current industry players.
• Exports have to be encouraged more. The IT Services industry grew on the basis of all exports being Income Tax free in the 1990s. While GST is exempt today, broader encouragement like Global Sales Support desks, Trade Commissions, Think Tanks on exports markets, desks by Ministry of External Affairs, and various Ministries of GoI, and loans / funding will help.
• While english speaking is an advantage for services, competence in Japanese, German, Spanish and French may also help in communication and business. A case – In a recent Vietnam holiday, we visited a mid sized Suits and Garments Tailoring showroom. A few minutes later, a batch of 20 odd Italian tourists walked in. I was stunned to see, a showroom sales staff made a fluent 20 minute presentation in Italian to them. Selling them 8 hour turnaround formal suits and traditional women’s dresses. No doubt the tourists bought lots of clothes that day.

Manufacturing and related thoughts

• Manufacturing in India remains a massive opportunity, with the first objective to meet domestic needs. Here the sectors with potential are Defense, Shipping, Railways, airplanes, electronic products – mobiles, laptops, TVs, music equipment, Air conditioners and gadgets. Silicon chips are a key input which also can be made domestically.
• PLI schemes have been started in 14 sectors to accelerate them.
• Assembly in India is just the first step to get the supply chain and value add to increase in India.
• We have to build on our success stories in automotive and pharmaceutical mfg. When will we be able to see an Indian made car succeed all over the world? Who will do this – Tata Motors? M&M?
• The success of Indian 2W is admirable – Bajaj Auto, Eicher Motors and Hero Motors are doing well.

• Why do Indian companies not list abroad? A quick check on ADRs and GDRs from India reveals a very short list of 10-11 companies. Any Indian company with significant global presence should list in USA or Europe.
  • Many years ago Cognizant listed in USA. It was riding global trends – HQ and listing in USA, IT workforce primarily in India, and customers in USA and spread across the world.
  • Chinese companies have long exploited this trend. A quick search reveals 286 Chinese companies listed in USA. Why have Indian companies missed this trick? The deepest stock market in the world is USA, listing here can give rich valuations, and help raise growth funds for Indian firms.
• A large number of MNCs operate in India with subsidiaries, GCCs and factories or development centers. Like Hyundai India and Schneider Electric Infra., can they be nudged to list in India? This would cement their presence and commitment to India, and help to deepen Indian markets.
• India has benefited from the free markets of the last few decades. With USA imposing tariffs for protection, India should continue trade with USA while growing free markets and trading with other countries and gain from global trade growth. To do this, it will have to lower tariff and non tariff barriers and sign Free Trade Agreements. At present 6-7 FTAs are under negotiation.
• Japan can be an excellent target country, for Indian firms to partner with Japanese MNCs, and help them develop India as a manufacturing base for global sales, with success stories like Maruti Suzuki.

Conclusions

• So Mr Leading Indian Bank CEO. USA isn’t just the place where you go on annual vacation to your brother’s house to admire the opulence and great roads. It’s the place you go with a crack team of CFO, CMO, retail head and CHRO, and plot your company’s 40% annual growth for the next decade.
• In the wake of Trump Tariffs, we see a change in global order, with China emerging strong.
• As some doors close, others can be opened. Indian firms have an opportunity to grab large chunks of the global services pie, while some can excel in select manufacturing opportunities.
• We see a future of the parallel rise of China and India, CHINDIA, in the next BIG Cycle.
• However there is little hope of cooperation, their rise will be independent and mutually exclusive, offering different products and services.

Disclaimers and Disclosures

• Any mention of companies in this article are purely to explain and illustrate a point, and these are not investment suggestions.
• This document has been prepared by JMI, and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JMI. This report should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JMI has not independently verified the accuracy or completeness of the same. Neither JMI nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Investment in the securities market are subject to market risks. Read all the related documents carefully before investing. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from a RIA Registered Investment Advisor. Registration granted by SEBI to JMI, and certification from NISM in no way guarantee the performance of the Research Analyst or provide any assurance of returns to investors.
• JMI has been an equity investment adviser commercially since Nov 2012, and a SEBI certified and registered since 2016, under SEBI (Research Analysts) Regulations. Any questions should be directed to punit.jain@jainmatrix.com. Name of the RA as registered with SEBI – Punit Jain, SEBI Registration No. INH200002747. Logo/brand names