The India Opportunity: The Mega Trends That Will Shape The Nation's Future

Sailesh Raj Bhan: See, like you said many things are changing. I mean, so you get a lot of those large opportunities that are present today. If you ignore the shorter-term trends, I think a lot of them may last for 10-15-20 years.  

So, let us take the simplest of those demographics there. So, it is well understood and known that India is a country of young people. It is actually over marketed. But one trend is that India also has the largest or the second-largest cohort of 50 plus people—and I think most of us in the room here—which is a sizable market.  

So, we never say India is a country of old people, but we say Germany is a country of old people, for Germany has just 3.7 crore people over the age of 50. Today, we have about 30 crore people over there and this will be 40 and this is the fastest growing cohort because the younger people are growing at 1.2%-1.3%. This (group) is growing at 3.5%-4% a year because of longevity and things like that. And, all of them need servicing support, leaving aside the medical side of it as well, but several other services are required to take care of this kind of a large population. This leads to retirement opportunities. This leads to many such opportunities which are there and this is less today. In a way, it is not at the top of the mind anywhere today, which can possibly be one of the biggest surprises you can find.  

In manufacturing for example, for the first time in the past 20-30 years, we are seeing the kind of scale that is really happening that you would have always wanted to happen in India. So, if manufacturing doesn't take off this time around for some challenge somewhere, I don't think we will possibly miss this big opportunity again. So that is one very, very large space and trend available, because at this scale, we can't live by imports. That is again happening.  

Third, in addition to this, you know you have the sense of the basic mutual fund industry itself. Even today, whatever we talk about we are a large industry XYZ, but you don't today. Just about 3-4% of India really invests and this can easily be 10-12% in a meaningful decade or so. That is the third-biggest piece which is there. I think everything is there. Zero friction now, established products now, and savings are there to be invested in. Hence, it is again a very, very large opportunity. But I think in India the beauty is whether you look left or right there is opportunity waiting to be capitalised upon. It is just the timeframe and obviously the execution to win it.

S Naren: Leave this demographic trend at itself. Take for example, the global capability centres, which were created by the company last year when oil went to $100-120. As usual, people like us started to worry about current account deficits and trade deficits and various things. What we ignored was that there were so many global capability centres that were created. After July, August, September, we saw services export booming. So, we asked a few people what was happening. We asked a very respected engineering company from Germany: Why is this services export booming. The company, which has its headquarters in Germany and a big manufacturing base near Bangalore, said if I need 15,000 engineers, where do I go? I have to come to India. So, they have as many employees in India as they have in Germany, and it is not part of the Indian listed entity because they basically support engineering services of the German company.  

Then, we asked a U.S. bank—one of the biggest in U.S. They said the same thing. You got more than 20,000 people in India today. We have to keep on hiring because it is much of what happened because of Covid. They said it became even more easier that we realised that a lot of things could be done online. A lot of things could be done through Zoom teams online. We actually shifted much more of our work out of U.S. Anyway, in the U.S. people don't go to offices. We said we can do it out of India, much more efficiently and they moved many of their work to India. So, this services export boom, completely kind of resolved the current account deficit. If you see the recent data of current account deficit, the whole issue has almost disappeared even though oil was high. And what happens is that all these people, who are all well-employed, cause their own consumption and that gives its own benefits. This is the side-effect of demographics. Why did that happen? It is because engineering colleges got set up way back in the 90s. When those engineering colleges were set up, we ourselves didn't know whether all the people who came out of engineering colleges would get jobs. But that caused its own positive setup after the I.T. boom of 2000. The I.T. boom resulted in an outsourcing boom. Then, it became easier to actually outsource. And now, with Zoom and such apps, it has become very easy to do things. So, we ourselves are not sometimes able to judge.

So, sometimes innovations need not make money. But the social good of payments in India is so phenomenal that you can't measure it in the form of the fact that people have not made money out of payments. Has there been an innovation certainly as India gained out of it? Yes. Have we created P/E based startups in payments? The answer is NO.

Sailesh Raj Bhan: Interestingly, we have seen that every last 20 years, some percentage of this whole middle-India has gradually moved towards better income levels. Now, technology has actually allowed all of these services and all of these segments of the market to offer services across the globe/board. So, the limitations and the friction have reduced. The biggest problem in this country was collecting money after offering a service. That has eased off because of all these things. This has provided them a platform to deliver the services. This has created opportunities. No single company or government can create enough jobs for India. It is just not possible. But this has created enough and more, I would say, trickle down of the money made by the top 10-15% in this country, who want to take all these services and it has exploded downstream. And as people will get more and more used to this, I think technology will work as an enabler. I think it is a movement. It is not a small collective change. It has also helped in upgrading of aspirations. People have seen that today everything is available.  

In 10 minutes, what you know today, everyone in each corner of this country will know. But I think that arbitrage, the information gap that used to be there, I think it has completely vanished. So that also getting them on reasonably good platform.  

In the field of education today, I have access to the best of the best teachers, 90% of the time free on YouTube, which never was the case when we were graduating. There is so much more happening there and this will all enable faster and faster growth, but it is no longer that you are looking at some large 10,000 crore investment, which is going to give jobs and things like that. There is a large, I would say, underlying economy functioning on its own and there are enough tools and this technology, which is enabling them. Like Naren said, we don't know how this will shape up over the next few years, but I think it is giving income, it is creating markets. I think as we normalize—in the sense, we still have some Covid impact—in terms of income and savings, as well as losses, things will get better.

S Naren: It is not an ordinary megatrend. It has to be an extraordinary mega trend. Housing and urbanisation has to be an extraordinary mega trend in India. If you look at China, the level of housing and urbanisation which has happened there, it is just so substantial. The housing stock that they have created over the past few decades is phenomenal. I think we are going to create that kind of housing and India only has to create it because today we are the people who have the demographics and which require it. It is a trend which has to be created and there is a need for many more supply-side practices and that I think has to happen across the country. People have to work to create those supply-side practices. I think you know there have been areas where the supply-side practices have worked very, very well. 

Take for example, the Indian I.T. industry. We managed to create an industry where supply-side practice was able to put large number of people into projects and make it happen smoothly. So, if you look at it like that, we need to have a situation in India also. We need to measure ourselves by the number of houses that we need to build. Even in a place like India, every city should start getting measured by the amount of square feet and the number of pucca houses that got built. We don't see that at this point in time.  

The good thing is that in areas like renewable energy, which is also part of a trend, there has been much more effort to create scale and the government has pushed everybody—thanks to climate change mega trend—to create scale and pushed everybody to create enough renewable energy.  

On housing and urbanisation, the same level of support is required so that we are actually measuring each state by the amount of housing it has created. If today, someone was to ask me, which is the city where maximum amount of houses is being created around 500 square feet, I will tell you I don't know, because frankly, there's no data available and neither any state nor anyone else would be able to tell you. However, if you ask me how much solar energy projects have been started in different states, I am sure in the next 12 hours I will be able to find out and tell you.  

So, I think it is very important that housing and urbanisation is a mega trend. But people have not had supply-side initiatives. In fact, if you talk to most people across the country, they will tell you there are so many bottlenecks in creating supply and because it is not a central subject, it is a state subject. And forget it is a state subject. It is a municipal subject. So, there have been a lot of challenges in so many places in creating supply. We must do something that China did—creating supply. The same thing has to be done in India.

Sailesh Raj Bhan: I think this was correct 10 years back. I think there are big changes underlying the situation, which we are unable to fathom today. When we look at data trends, which are there, proxy data of where vehicles are being sold, a lot of spaces are appearing.

For example, the kind of growth that the state of UP has seen in the past several years has been stunning. So, I think it has now become more a bottom-up kind of a country in the context that, may be even 100 cities functioning well and growing rapidly versus earlier, 10 years back, which used to be just these three, or four cities which account.

It may still be that these cities account for a large proportion of it, but I think growth is in, the second tier, third tier cities which are exploding rapidly. For example, recently I was in Hyderabad—and every time you go it is a completely new landscape—on the new side of the city. Just as you are seeing, the best of the best office infrastructure is being built by the largest of companies, each having 15,000 people. And many, many such companies they are having. And things are changing, thanks to the I.T. trend, thanks to everything. So, I think it is no longer the narrow India, which used to always struggle. Wherever there was some growth, you know, we always had those bottlenecks and problems. I think it is now spreading out.

S Naren: I think without affordable housing going up, it is not a mega trend. If you are going to construct 1 lakh houses for people, who consume at the prices you talked about, it is not a mega trend. It is a micro trend. So, I think it is going to happen. In fact, if you see on the lending side, I see so many players who come to me and say they are starting an affordable housing finance company. So, it would be very surprising if you knew what you read in the newspapers, because what attracts media attention is not the houses which sell for Rs 20 lakh. But if I look at the number of players who come to us in the mutual fund industry, and talk about affordable housing, I believe that there is a lot of activity happening. And in between, there was a lot of subsidy also given. I don't know whether the subsidies on affordable housing are still given, but the government was giving subsidy and that had given a huge fillip to affordable housing.  

Actually, about three or four years back I am not very sure whether that continues at this point of time and that subsidy actually had given a huge fillip to affordable housing. ….. What you are talking about is one trend, but it is a broad-based tread, and as Sailesh pointed out, you may be looking at a few cities.

However, there is a fair amount of real estate activity across and the best indicator of that is cement demand. If you look at cement demand in the first quarter of this year, from April to June, it has been extremely buoyant. It has been extremely buoyant across the country, which is a sign that construction activity has been booming across the country and it is not a price-based move, it is a volume-based move. So, I believe that there is a clear situation where construction activity is booming across the country, and it is not localised to Gurgaon, or Noida, or Mumbai. I think Pune must be booming even more than Mumbai.

Sailesh Raj Bhan: It is happening as we speak. Like in the previous session, it was said Europe tried to adapt to it early on in the cycle, either gas or even solar. They are all set up at extremely high prices. My belief is that in any mega trend, the economics of business have to start happening. There will be external support and things like that. But when the economics are right, solar power technically is cheaper. You can create it in shorter cycles. You don't have the challenges of the past. You don't have environmental challenges beyond what we have seen before, not to that extent, and the pricing is right, you can supply at Rs 2.50 or maybe Rs 3 rupees, at least during the day. When that happens, noting can stop the trend from accelerating. So, everything is at a tipping point. So, there was a tipping point of mobile in terms of pricing. Then you know, already 80-100 crore people are having that. I think that has happened for solar. Then, there is this pressure. In addition to that, there is this climate change effort globally to make it happen. You know, less carbon everywhere and that is feeding a lot of capital into this. So, economics is right. There is a need to do it. There is a lot of commitment globally to do it. Leaders see it as what they want to leave as a legacy to the world. I think there is nothing in all these four or five things coming together. It is a trend which should, in my opinion, continue. And, interestingly the amount of capital that goes into it is generally two to three times the amount of capital that goes into traditional coal plants for the same amount of power produced. That again means large investment and modernisation everywhere. So, I think in all probability, this is a trend we will possibly see accelerating rather than slowing down. 

S Naren: When this solar trend came up, we used to think what will you do about power demand at this time of the day? Solar is not going to supply power at this time of the day. At that point of time, the only thing was lithium, which is not available in India. We used to worry a lot three years back. Actually, in my childhood, I used to go to my grandmother’s place to stay. There was a power plant, which was a pump storage plant at a height. And I knew that that pump storage was used for peaking power. I never knew that pump storage could be done with much, not necessarily, with a big height difference. But suddenly, about a year back what I realised is that government did superb a work on this area. It came up with a view that along with solar you are to add pump storage. And if you do solar plus pump storage, you can solve the problem. You don't need lithium battery to the same extent. So, we spent worrying about this whole concept for three years in our company. How will you handle power demand between 6pm and 8pm because battery costs are so high, and India does not have lithium like Chile or Australia. But the problem is more or less getting reduced by this pump storage idea.  

Today, the government is actually moving very, very fast on pump storage and if pump storage could be a solution, we would have a situation where we would have solar, we would have wind and we would have pumped storage as a solution. So, you know, finally we are public market investors. We have to look after investors' returns. If you had asked me 10 years back, I would have said that telecom would be the best investment opportunity. But you know what happened to telecom for the first six years. Telecom was the biggest negative return generator as a sector. You and I think this is a beautiful innovation. For six years, telecom changed my life—both, iPad and my mobile phone. But what was the equity market return for the first six years—negative.  It is only in the past four or five years that I got the return. So, I believe, sometimes innovation and stock market returns are not necessarily linked. The returns came from all the consumption stocks. But the returns didn't come from telecom, whereas people who set up e-commerce websites made money. If you go back 10 years, how many telecom companies were there? Two or three have succeeded, one is barely surviving. That is the reality of the situation.

S Naren: When we think of innovation, ideally who makes the money, who survives, who makes mega money—these are all difficult things and finally, we are managing public money. If we are going to lose money for the investor, that person will take out money from us. So, we actually have to think about who will make money in the next two to three years, rather than who will make money in the next 10 years, which is only for the Warren Buffetts of the world to answer.

Sailesh Raj Bhan: We are looking at future trends to come and things like that, but existing, underlying large trends, which have already an established business, we have this at the back of our mind that large companies cannot become larger. Only smaller companies can, find or grow much faster and grow for longer periods of time, or will catch a trend. I think some of the midsized businesses in India today are very much capable to latch on to any of these larger trends that are available. I think, 80%-90% of the winners can still come from companies which are already there, already existing, already profitable and have managements to capture some of these trends.

S Naren: I define markets into five phases. I call it a Bust, which happens when Lehman happened, World Trade Centre happened, Covid happened. That is the best time to invest, if you have the guts to invest.  

The second is Best. That is when there is no such crisis, but markets are basically in bad shape. It s the best time to invest.  

The third is Boring. That is when there is no problem but not too much FII buying, not too much mutual fund buying.  

What is Boom? What is happening today in smallcap and midcap. What we have seen in the Boom phase is, if you have invested you would normally not make money in the medium term. You have seen boom phases like 2006 to 2008, 2017, all these phases and 1999. In these phases, you invest. You don't make money in the medium term. But the problem for people like us is the near term. You may make money because there were people who were negative in 2007 January. But, from 2007 January to 2008 January, the market kept shooting up. So, in the near term, the market can go up as much as it wants to, and you are not capable of determining that. So, in a Boom market you are capable. The medium term is the problem. In the short term, market may go up. In the long term, India is a good structural story and normally people don't hold till long term when they invest in a Boom market. 

The last phase is the Bubble phase. In the Bubble phase, whoever invests will lose money.

S Naren:We are in the Boom phase. In Bubble phase, what happens? The market narrows. Then, there will be only a few stocks which go up. So today, we are in the Boom phase in smallcap and midcap space. We are not in the Boom phase as far as the largecap, multicap, or flexicap, are concerned. So, this is a tough task for us to explain to our investors.

Sailesh Raj Bhan: These phases will come you know. They will come every two years, every three years. There is no respect for risk and you see people just putting money based on what past three returns are. Our basic thing is, when three four-year returns are very good, you have to be extremely careful. That is what is happening today. Smallcap returns have been extremely good in the past three-four years. And today, the perception of largecaps is that they are slow growth businesses. Now, nobody wants to put it, or it is not fashionable and that has made them attractive. So, I think as rational investors some allocation changes in this kind of framework will just allow us to sustain and capture wherever respective or relative value lies.

S Naren: Well, I think, basically our view is that the corporate sector is in extremely good shape. From the years 2010 to 20—10 years—the corporates took to clean up their balance-sheets. Now, the corporate sector is in extremely good shape. Currently, the corporate part of the credit cycle is in extremely good shape, they need to leverage. And like the previous thing, I think the opportunity sometimes comes on the capex side because I think there is no sign of any bad debt on the corporate side of the balance-sheet and maybe there is a possibility of a capex cycle like what came out in the previous panel also. And that is how we look at it and that is why that side of the balance-sheet, we spent 10 years cleaning up. The problems actually were based on loans given in 2007, the final bad debts got resolved in 2020. But right now, things are pretty fine.

Sailesh Raj Bhan: This 3D printing first came 15 years back you know, in economics. That was in 2007. So, it is useful for very niche areas. I don't think it is mainstream today. Economics is mainstream today. The existing construction technology is enough. In every 15 days, now you can have one floor of a high-level building constructed. So, it is not a problem. Now, technology is not a problem. The constraints are somewhere else, the constraints are land related problems, title issues. Constraints are lack of local municipal permissions which are required there, or just the younger entrepreneurs in the real estate side having challenges in terms of managing their cash flow and money.

Housing is also cyclical in the context that  it will create excessive capacity. You have a weaker cycle around that. You end up not being able to finance. It is not about technology or its pace. Technology has improved tremendously in the past 10-15-20 years. It is more about the other aspects of real estate or housing, which are the problem areas.

S Naren: I have been in the mutual fund for 19 years. Initially, we started out by being on the retail side. just equity. From equity, we moved much more into categories like balanced advantage, moved much more to selling SIPs. Today, we try our best to recommend categories like multi-asset. I think between SIPs and categories like balanced advantage and systematic transfer plans and categories like multi-asset, I think a fair amount of market development has happened to increase market participation. Then, it is left to people like you and the digital platforms and the entire digital ecosystem to take it from where we are today. I think the challenge today, when we look at the data, is the number of people who pay income tax in India. The number of people who earn income above a certain amount in India, that itself is a challenge in India. If you ask, that is what the data seems to suggest.  

I think the mutual fund industry has done a good job of actually getting people who earn above a certain income into the thing. Where we have failed maybe is that we don't have the equivalent of Jan Dhan account or those kinds of things. What can be done to get a Jan Dhan account kind of person into the mutual fund industry. I think there we are yet to do something if you ask me and that expansion is what led to bank accounts going from one number to a number which was five times bigger. There we have not succeeded so far. That is how I look at it.  

Sailesh Raj Bhan: If this kind of a large change in the industry were to happen some 5-7 years back, this would have become main-stream. You know that change was so rapid even for us to get a sense of. So, there was a change. Today, there is zero friction. There is no better or more transparent product than this compared to a lot of other products which are there, very, very well-regulated and you know which in a sense means that investor protection is extremely high there. Everything you want is there, it is ready, just about. Also, past 10 years income growth in India, real-income job creation has been below average for various reasons, the global slowdown and things like that. So all that also leads to a deferment you know, a gap in terms of how economic incomes have grown for people and their ability to save. But I think we are ready, platform is there, brand is there in the context that you know mutual fund is now a respected choice today. If somebody is putting money in an FD, he does consider mutual funds as a category to do it. I think the greater we simplify, we get products that are a little simpler, a little easier to understand, and maybe for first-timers come up with some solution-based products, I think it should work. I think it will happen faster than all of us think and I think we are on that journey today itself.