Economic growth: exploring india's hidden growth engines

Sunday, December 29, 2013, New Delhi

Efficiency of an economy is as crucial as growth, considering how hard it is to build a formidable model. To that effect, the toll bridge model is what comes to mind as an analogy to demonstrates the general behaviour of common people if they are offered alternatives. It is interesting to observe the pattern of choices people make and the ensuing efficiency of the system.

In his speech in Mumbai, Narendra Modi offered an interesting glimpse of the efficiency of toll bridges in Gujarat and Maharashtra. He highlighted the case of the twin toll bridges at the state border, each falling on either side within a distance of 2 km. Apparently, every car that passes one toll bridge must pay a visit to another as there is no exit in between. Considering both toll bridges receive the same number of visitors, with similar tariff rates, it is obvious both sides must declare similar revenue. Surprisingly, according to Modi, Gujarat clocked more than three times the revenue than that of Maharashtra. While it can safely be assumed that the cost to build highways on either side was not different, yet, the relative efficiency of operation of either side is incredibly glaring.

The toll bridge business model is a relatively new phenomenon of modern day economics. It is, in effect, a shift from localized to a global business model. The two models differ in scale and efficiency. While the localized model offers customised solutions to local problems; its relevance is confined to a locality. A globalised model is a strategic shift in the way traditional business is done. Here, the focus is in creating wider appeal to bring global citizens on the platform that is cheaper, better and more efficient.

Creating efficient alternatives are not necessarily part of ambitious initiatives; they have proven effective economic multiplier effect. The Google model proves the point here. Riding on its search engine highway, Google has opened up marketing opportunities to small businesses and individual entrepreneurs that earlier were either very expensive or simply not available. The long-tail effect of the efficient engine is evident from the fact that more than 50 percent of Google's advertising revenue comes from people and companies that are comfortable advertising at a very low cost. Not that such people and companies are fooled into trial schemes of some sort. Such entities continue to use Google's engine because they can see their top line move. According to International Journal of Internet Marketing and Advertising, for every $1 investment in Google Ad sense, the company (and hence, the economy) receives $8 in profit. In economic parlance, the multiplier effect of Google's engine in the economy is an astounding 8 times.

Google's model is not much different than that of a toll bridge. Effectively, it offers value-added services to the traffic that trespasses the information highway it has build over years. In a sense, it maximizes the efficiency of the business model by offering a robust highway and, in exchange, charging a small fee for its services.

The case in point referred by NarendraModi in his speech is a classical depiction of inefficiencies prevailing in our economy. There must be numerous other growth engines rusting in seclusion. Resolving such inefficiencies in the system will serve as instant booster to the growth of our economy without deploying additional resources. We must restart our hidden growth engines.

(Samar Vijay is Director, InvestCare, a leading fund management company. You can reach him on twitter @samarvijay)

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