## Introduction The following essay examines the patterns of economic growth of two nations: the United States from 1870 to 1970, and India from 2014 to the present. The narrative is inspired by Robert Gordon's seminal work, [The Rise and Fall of American Growth](https://www.amazon.com/Rise-Fall-American-Growth-Princeton/dp/0691147728), which meticulously charts the American experience. We extend this analysis to contemporary India, observing its remarkable trajectory of development, and drawing parallels and contrasts with historical America. This comparative analysis aims to explore how technological advancements, infrastructure development, and policy reforms have shaped the paths of both countries while highlighting some of the universal principles of economic growth. ## America, 1870-1970 I often think about the first half of Robert Gordon’s book, “The Rise and Fall of American Growth”. It traces America's history from 1870-1970 and the enormous changes the country went through. In 1870, America had just come out of the Civil War and was a patchwork of rural economies with little connectivity between regions. Someone from California had no ability to interact in any reasonable manner with someone in New York. Agriculture was the dominant industry and employed the majority of the labor force. Literacy, life expectancy, and infant mortality rates were comparable to some of the least developed countries today. Fast forward just 70 years to 1940, and America had emerged as an industrial powerhouse. By the time World War 2 came to an end, the US was the world’s largest economy, commanding 25% of the world's GDP, with state-of-the-art physical infrastructure, mature capital markets, and nationwide communication networks in the form of telephones, TVs, and radios. So what happened during this, arguably brief, 70-year period? In short, these 70 years represented the *networking of America*. Here is a summary of the changes the country went through, taken (and edited) from the [Roots of Progress](https://rootsofprogress.org/summary-the-rise-and-fall-of-american-growth) blog: 1. **Transportation networks:** America already had railroads by 1870, but railroads only solved intercity travel. Last-mile connectivity within cities was still carried out by horses, which were slow and expensive to maintain. The invention of the internal combustion engine and Ford's Model T made cars affordable and widely available. By 1970, the US developed the interstate highway system and commercial air travel, which became key components of the US transportation infrastructure. 2. **Communications:** In 1870, communication was primarily done through (slow) postal mail or (expensive) telegraph, which limited communication between regions. Over the next 70 years, America developed new, powerful communication channels in the form of telephones, radios, and movies. These technologies allowed people in, say, California to talk (in real-time) to people in New York, boosting trade & commerce, and reshaping industries like entertainment, news, and publishing. By 1970, the television industry had become the dominant communication medium. 3. **Housing:** In 1870, people had to haul water, coal, and wood to be used inside the home. The 1870-1940 period saw the creation of centralized gas and water supply, sewage systems, and electrical grids, which replaced outhouses with toilets, gas lights with electric lighting, and fireplaces with central heating systems. Electricity also allowed for the invention of appliances like washing machines, improving cleanliness and reducing total housework. 4. **Public Health:** Between 1870 and 1940, significant advancements were made in public health, with the pasteurization of milk, the introduction of a centralized water supply along with water filtration and chlorination in all major cities, and the establishment of the Food & Drug Administration, which set rules around the purity and safe processing of meat, milk, and pharmaceuticals. These measures led to a rapid decline in mortality rates and by 1970, the discovery and widespread application of antibiotics had become a game-changer in the treatment of bacterial infections, marking a monumental step forward in medical science. 5. **Work:** For men, work shifted from dangerous and uncomfortable manual labor on farms to safer and more comfortable jobs indoors. Some of that work was routine, but an increasing share of it was not. For women, the introduction of time-saving appliances, and centralized heating, gas, and water systems significantly improved opportunities for education and personal development. Before these innovations, domestic chores consumed a large portion of the day, with tasks like laundry, cooking, and cleaning being particularly labor-intensive and time-consuming. These duties often fell to women, limiting their availability for other activities like study and employment. Appliances like washing machines, and stoves, reduced the amount of time and physical labor required for household tasks, and the free time could then be redirected towards education, leisure, and other pursuits. The availability of electric lighting extended the day, making it possible for activities, including study, to be carried out after dark. As a result, women had greater opportunities to pursue education, and this period saw an increase in women enrolling in schools and universities, contributing to higher literacy rates and greater participation in the workforce. ### Implications for US Enterprises As America's infrastructure and technology networks expanded during this period, its economy underwent a profound transformation. This era saw the rise of massive national enterprises that outpaced smaller competitors through several strategic advantages: 1. **Harnessing the Power of Large-Scale R&D:** This period was the beginning of industrial-scale R&D efforts, allowing companies to achieve significant technological advancements and efficiencies. Ford's Model T, General Electric's invention of the incandescent light bulb, and DuPont's development of Nylon are all results of such investments. 2. **Building National Advertising, Sales, and Distribution Networks:** The newfound ability to transport and sell goods across the country, along with new communication networks, encouraged firms to invest in nationwide advertising, sales, and distribution channels, changing the way products were marketed and sold. By leveraging mediums like radio, and later television, firms like Coca-Cola, Proctor & Gamble, and Heinz could reach consumers across the country with a unified brand message. This nationwide reach was impossible for smaller competitors to achieve, giving larger firms an unparalleled advantage in capturing market share. Furthermore, the development of national distribution networks ensured that these companies' products were available across the United States, thereby cementing their presence and dominance in the market. 3. **Access to Capital Markets:** All of the above was made possible by access to cheap capital. This period saw the emergence of the modern financial system, characterized by the creation of the first generation of investment banks like JP Morgan and Goldman Sachs. The formalization of the financial sector lowered the cost of capital, allowing firms to borrow to invest in R&D, national sales and distribution networks, and finance acquisitions that consolidated their market position. Access to capital was a crucial factor that allowed these large enterprises to pursue aggressive growth strategies and investments that were beyond the reach of their smaller counterparts. The result of these factors was a fundamental shift in the structure of the American economy, characterized by the rise of large enterprises. It led to technological progress and economic growth, while also creating a concentration of market power and a growing divide between the large market leaders and their smaller counterparts. These developments have had lasting impacts on the U.S. economy, influencing business strategies, regulatory policies, and the overall market structure well beyond the 20th century. ## India, 2014-Present India is currently going through a similar period of transformation over the last decade, getting networked and formalized as an economy: 1. **Transport & Communication Networks:** India’s highway network has [doubled](https://linkedin.us19.list-manage.com/track/click?u=52ada2ee20240692fbeb44407&id=51840cea67&e=e48059849b), local airline traffic has [doubled](https://linkedin.us19.list-manage.com/track/click?u=52ada2ee20240692fbeb44407&id=9e17abb9ba&e=e48059849b), and the number of households with broadband connections has [grown 7x](https://linkedin.us19.list-manage.com/track/click?u=52ada2ee20240692fbeb44407&id=c52f160959&e=e48059849b). 2. **Tax Reforms:** The country has undergone major reforms in direct and indirect taxes, with the introduction of a common, nationwide indirect tax system (GST) to dramatically simplify the tax code, a sharp reduction in corporate tax rates, and a drive to formalize the economy by cracking down on tax evasion. 3. **Financialization of savings:** The number of bank accounts has trebled, and the number of brokerage accounts has quadrupled over the last decade, giving much of the country access to fundamental financial products, encouraging savings, and investment, leading to a lowering of the cost of capital in the financial system. 4. **Digitized Social Security:** The integration of bank accounts, digital IDs (called *Aadhaar*), and mobile phones has allowed India to implement an automated social security network. These three factors have combined with the *India Stack* (more on this later) to enable a range of applications, from digital payments to tracking COVID-19 vaccination status, to paying highway tolls. ### Transport & Communication Network 1. **India's highway network** has nearly **[doubled](https://linkedin.us19.list-manage.com/track/click?u=52ada2ee20240692fbeb44407&id=51840cea67&e=e48059849b)** from ~79,000 km in 2012 to ~150,000 km in 2022. This has provided last-mile connectivity to previously remote areas, boosting trade and economic growth. 2. **Creation of Industrial Corridors:** Rail is one of the cheapest modes of transportation. At the moment, India's railway infrastructure is primarily used for passenger traffic, which has come at the expense of freight traffic. Goods are hence required to be transported by road, which is much more expensive, thereby increasing logistics costs and making Indian goods uncompetitive in world markets. The government is therefore [building](https://swarajyamag.com/infrastructure/explained-how-dedicated-freight-corridor-project-is-a-game-changer-for-21st-century-india) dedicated, freight-only railway lines to allow trains to transport higher loads faster, cheaper, and more reliably. 3. **Air travel:** The number of operational airports in India went from 74 in 2014 to 140 in 2022. This has led to a surge in the number of air passengers in the country, [doubling](https://www.dgca.gov.in/digigov-portal/?page=jsp/dgca/InventoryList/dataReports/aviationDataStatistics/handbookCivilAviation/HANDBOOK%202022-23.pdf&main4252/4205/sericename) from 58 million in 2012-13 to 137 million in 2019. 4. **Internet Usage:** The proportion of the Indian population using the internet has [risen](https://www.statista.com/chart/30029/internet-penetration-rate-in-india/) from 13% in 2012 to 49% in 2023. India already has the most internet users in the world and uses the most mobile data, since the cost of mobile data in India is 1/3rd the cost in the US. ![[statistic_id729992_length-of-national-highways-in-india-fy-2003-2022.png]] Source: [Statista](https://www.statista.com/statistics/729992/india-length-of-national-highways/) ![[india_internet_connectivity.jpeg]] Source: [Statista](https://www.statista.com/chart/30029/internet-penetration-rate-in-india/) ### Tax Reforms India is one of the only countries in the world to make radical changes to its direct and indirect tax regimes in a single decade. The changes were made to improve the ease of doing business, bring businesses and firms into the formal economy, boost tax collections, and make the country globally competitive: 1. **Unified Indirect Tax Regime:** India had one of the most complicated indirect tax regimes in the world. So complicated in fact, that, in the [words](https://www.youtube.com/watch?v=BwIE0puJRm8&pp=ygUSc2FuamVldiBzYW55YWwgZ3N0) of Sanjeev Sanyal, "*...it was easier for Mumbai to trade with Shanghai than it was for Mumbai to trade with Delhi.*" The introduction of the **Goods and Services Tax (GST)** in 2017 has created a common indirect tax for all goods and services in India (rather than multiple state-level indirect tax regimes). This was the equivalent of India signing a free-trade agreement with itself. As a result, interstate trade has boomed, and GST collections have [risen](https://www.ndtvprofit.com/gst/gst-in-charts-how-collections-have-fared-in-2023) from US $136 billion (5% of GDP) in FY19 to US $174 billion in FY22 (5.6% of GDP), and growing rapidly. 2. **Simplified Income Tax Regime:** Direct tax collections as a percentage of GDP were 5.6% in FY12. Since then, tax rates have been lowered and simplified, while enforcement has been stepped up, increasing compliance. As a result, by FY22, direct tax collections had risen to 5.9% (pre-COVID, this number had reached 6%). 3. **Corporate tax cuts:** Corporate tax rates were [cut](https://pib.gov.in/Pressreleaseshare.aspx?PRID=1585641) from 30% to 22%, bringing tax rates more in line with global standards, and leaving companies with more cash to reinvestment back into their businesses. ### Banking Reforms A lot of the loans made to the Indian power and infrastructure sectors in the 2000s went sour starting in 2011. By 2015, the Indian banking system ratio was in serious trouble: 1. **Recognizing Non-Performing Assets (NPAs):** In 2015, India's central bank, RBI, launched an [Asset Quality Review](https://indianeconomy.columbia.edu/sites/default/files/content/201904-Chari%20et%20al-NPA%20Crisis.pdf), under which banks were forced to recognize Non-Performing Assets (loans where the borrower has stopped making payments for at least 90 days), and were no longer allowed to "restructure" problem loans to hide stressed assets. 2. **Insolvency and Bankruptcy Code:** In 2016, the [Insolvency and Bankruptcy Code](https://swarajyamag.com/magazine/how-ibc-provides-a-much-needed-framework-for-creative-destruction) was introduced, which brought in modern bankruptcy processes for liquefying economic assets and prioritizing creditor rights, causing unscrupulous promoters to lose control of their firms in the bankruptcy process. ### Digital Social Security and the India Stack The India Stack has been the most unexpected part of India's growth story. In the words of Aaryaman Vir and Rahul Sanghi from [Tigerfeathers](https://tigerfeathers.substack.com/p/the-internet-country): >Under the banner of a program known as India Stack, \[India] has been solving for the three economic primitives of identity, payments, and data for over ten years.  > >It is this set of digital building blocks that led Bill Gates to [remark](https://pn.ispirt.in/india-stack-takes-the-digital-india-campaign-to-a-whole-new-level/) in 2016 that India was on the cusp of 'leapfrogging the world'. The India Stack consists of the following components: 1. **Aadhaar:** Until 2009, over [400 million Indians](https://cacm.acm.org/magazines/2019/11/240375-india-stack-digital-infrastructure-as-public-good/fulltext) were estimated to lack any form of formal identity document. The Aadhaar program set out to give every Indian a digital identity, and within 5 years, a ***billion*** Indians had received an Aadhaar card. This has helped hundreds of millions join the formal economy and access products and services folks in the developed world take for granted. 2. **Bank Accounts:** Once every Indian had a formal, digital identity, it became very easy for banks to seamlessly onboard previously unbanked customers. Since Aadhaar was a digital identity system, there was no need for physical KYC, cutting onboarding time from days to mere hours, and [reducing](https://documents1.worldbank.org/curated/en/219201522848336907/pdf/Private-Sector-Economic-Impacts-from-Identification-Systems.pdf) onboarding costs from $23 to an estimated $0.15. The results are stunning. In 2011, roughly 20% of all Indians had a bank account. By 2018, that number [shot](https://www.bis.org/publ/bppdf/bispap106.pdf) up to 80%, leap-frogging the traditional development process. This surge has given millions access to formal banking services, credit, and the ability to save and invest. 3. **Smartphones:** Telecom companies also benefited from e-KYC, allowing them to sign up over 100 million customers in just 6 months. Before the e-KYC days, people had to wait days for telecom companies to verify their identity and issue a SIM card. Now, it could be done in a few minutes. This gave millions access to cheap smartphones, which became their portal to access the internet. 4. **Digital Payments:** Now that every Indian had a bank account and a smartphone, the government decided to solve for another economic primitive - payments. In 2016, it launched an instant digital payments network called *Unified Payments Interface (UPI)*, which has now grown into the world’s largest real-time payments interface. Peer-to-peer and peer-to-merchant UPI transactions [rose](https://www.npci.org.in/what-we-do/upi/product-statistics) from US $1 billion in FY 16-17 to US $560 billion in FY 20-21. BHIM UPI transactions accounted for [15% of GDP](https://pib.gov.in/FactsheetDetails.aspx?Id=148558) in FY 19-20. 5. **Direct Benefit Transfers:** With every household now having access to a bank account, the government is now able to transfer benefits directly to over 100 million households that qualify for government subsidies, cutting out tens of billions of dollars in graft and inefficiencies due to middlemen in the old, cash-based system. ![[upi_transaction_volume.avif]]Source: [Livemint](https://www.livemint.com/mint-top-newsletter/easynomics06042022.html) The India Stack has now expanded to many other parts of Indian life, from paying highway tolls to tracking COVID vaccination status for citizens to accessing credit based on cash flow history instead of asset collateral, playing an important role facilitating economic activity in the country, and giving rise to new business models that would otherwise have not been possible. I cannot cover the India Stack in enough detail here, but if you're interested, you should check out the [Tigerfeathers](https://tigerfeathers.substack.com/) Substack for more information. ### Implications for Indian Enterprises The development patterns of India from 2014 to the present mirror the rapid industrialization and networking experienced by the United States from 1870 to 1970, albeit with unique contemporary characteristics and at an accelerated pace, thanks to technological advancements. This period of change has profound implications for Indian enterprises: 1. **Larger Customer Base:** With millions of people gaining access to smartphones, financial services, and the Internet, Indian firms will have the opportunity to sell to a much larger pool of customers than before. This will affect every firm in every industry, from retail to digital advertising to finance. There will be some challenges (first-time internet users, low-disposable income, etc) for firms to navigate, but if they are successful, they will be able to tap a brand-new market that was previously inaccessible. 2. **Embracing Technology and Innovation:** With better transport and communication infrastructure, Indian firms will be forced to level up their operations and introduce new forms of technology and innovations that were not possible before (if you don't have reliable access to electricity or the internet, it does not make sense for the firm to invest in things like software to optimize its business). But now, with better infrastructure and resources, enterprising promoters will have the opportunity to invest in things like automation to reduce labor costs, and ERP software to reduce working capital cycles, allowing them to improve efficiency, increase profitability, reinvest excess cash back into the business, and pull ahead of the competition. 3. **Leveraging Data and Analytics:** With the proliferation of digital infrastructure like the *India Stack*, Indian firms will have access to new sources of data, like payment history from payment apps, and cash flow information and [TODO]() from banks and brokerages. The Indian financial services industry will be especially well-suited to take advantage of such data to make lending decisions and provide credit to people who would not have qualified for a loan under traditional models (see this Tigerfeathers article about [OCEN](https://tigerfeathers.substack.com/p/ocen-a-conversation), another India Stack framework to provide credit based on cash flow history instead of collateral). But firms in every industry will eventually need to invest in their own *Data Engine* teams to make better, data-driven decisions. 4. **Concentration of market power:** The networking of India is essentially creating a single, common market, which will cause a consolidation of market share in the hands of a few firms in every industry. Local, less efficient, mom-and-pop businesses will not be able to marshal the same economies of scale or leverage the same cost of capital as larger firms with access to better talent and greater pools of funding. Moreover, regional firms that were earlier outside the formal economy will be forced to report earnings, pay taxes, and comply with business regulations. These regional firms are unlikely to stay profitable and will start shuttering, further ceding market share to the larger, national firms. ## Conclusion The United States from 1870 to 1970 and India from 2014 to the present, while separated by time and geography, share underlying themes of technological innovation, transport and communication infrastructure development, and policy reforms. In the United States, the century following 1870 was characterized by the networking of America, laying the foundations for the country to emerge as a global industrial powerhouse. The transformation was profound, touching every aspect of life and setting the stage for the modern American economy. This era underscored the importance of technology, infrastructure, and thoughtful policymaking in fostering economic growth and improving living standards. In a similar vein, India's ongoing transformation since 2014 showcases the potential of technology, and policy reforms to accelerate economic development in the 21st century. The digitization of the economy, improvements in physical and digital infrastructure, and formalization of the economy have set up the country for tremendous economic growth for the coming decades.