It was a clear example of messy democracy in action, highlighting the challenge facing the United Progressive Alliance (UPA) 19-party coalition of Prime Minister Manmohan Singh as he leads India into the 21st century.
Capturing imagination
The Singh government has caught the imagination of the world. “India is an idea whose time has come,” said Rahul Bajaj – chairman of Bajaj Auto, a motorcycle and scooter manufacturer – speaking at the opening session of a conference in New Delhi sponsored by the Commonwealth Business Council and the Confederation of Indian Industry.
What must be borne in mind, though, is that India has been opening up and transforming its economic model for the past 14 years. Even Kamal Nath, minister of commerce and industry in the current Congress-led government, acknowledges this.
“In 1991 we embarked on an Indian-specific model of development, an all-inclusive reform process and, despite the many governments [since then], the boat has not rocked,” he says. At the beginning of the 1990s the Congress government – including Mr Singh and Palaniappan Chidambaram, the current finance minister – began the process which was subsequently taken forward by coalition governments led by the Bharatiya Janata Party (BJP).
Steadfast reforms
Investors feared the consequences of the 2004 election upset, which saw the BJP pushed out of office as rural voters protested at the lack of benefits from reform for them. But the Congress party, despite having to govern in coalition with a couple of nominally communist parties and a host of others, has proved steadfast in its reform agenda while attempting to spread the benefits more widely.
Progress is already apparent in some of the most important agenda items for India – bureaucracy, infrastructure, foreign direct investment (FDI) and manufacturing. Take the famed Indian bureaucracy, a legacy of the British Empire along with the parliamentary system. It takes an average 89 days to start a business in India, compared with 41 days in China and 18 days in the UK, according to the World Bank.
“An economy that works on systems and policies is prone to bureaucratic delays,” Mr Nath told The Banker. “But, on the other hand, the new generation of bureaucrats is looking at an enabling role. That is becoming evident in the assessment we made of time lags. There has been a substantial improvement. It is not satisfactory, but we are moving towards it.”
Industrialists agree. Ratul Puri, executive director of Moser Baer, one of India’s fastest growing companies, says the government had done a lot of work on the bureaucracy over the past decade (see below).
“We don’t see as large a challenge from the bureaucracy [as from infrastructure]. We rarely interact with the government. The level of bureaucracy in Germany [is larger than] India from the overall, day to day, operating perspective,” he adds. Mr Puri’s family-owned company, the third largest maker of optical media (CDs and DVDs, etc) in the world, is setting up a manufacturing plant in Germany.
Having acknowledged the need for reform in administration and governance, Mr Singh has introduced a number of measures, including setting policy targets for different ministries to make them accountable; co-opting state governments where a lot of the problems lie; setting up citizens’ charters so that people understand what should be delivered by the ministries; and depoliticising roles such as those of undersecretaries in order to ensure policy continuity.
Infrastructure targeted
“Infrastructure growth is not keeping up with the growth of the economy and the aspirations of the people,” says YK Modi, immediate past president of the Federation of Indian Chambers of Commerce and Industry and chairman of Great Eastern Energy Corp.
But the government has targeted $200bn in the next eight years to be spent on infrastructure using a mixture of India’s hefty $135bn of foreign exchange reserves, taxes and public/private partnerships.
Greater advancement in this area could be achieved by freeing up all remaining restrictions on foreign investment in infrastructure, says Jerry Rao, chairman of outsourcer Mphasis and Nasscom, the Indian software industry’s association. But, politically, it is a move too far for the coalition government.
Still, some foreign participation will be allowed through special purpose vehicles, taking advantage of the welcome the government extends to non-Indian investors in many areas.
FDI wanted
That the government is very aware of the need to increase FDI over the next few years is apparent from a comment made by Mr Chidambaram a few months ago: “At the recent meeting of the finance ministers of the G7 countries, the finance minister of China looked in my direction and told the gathering that China had received $500bn worth of foreign investment since China opened its economy in 1980. Of this, nearly $60bn came in calendar 2004.”
FDI into India was only $3.4bn in 2003/2004. But, where China falls short, Mr Modi said, is that up to 80% of foreign companies in India are expanding their businesses as well as repatriating profits, something that cannot be said for that number of foreign companies based in its Asian competitor.
A number of recent measures taken by the government should see FDI increase, as well as making business easier for locals. It is worth noting that this not only involves IT services and outsourcing, responsible – despite the publicity – for only 3% of GDP, but also manufacturing, which has received less coverage outside India but is responsible for 31% of Indian GDP, according to the government. The 2005 budget focused on manufacturing, including reductions in peak customs duties, the introduction of VAT, lowering of corporate tax rates and streamlining processes to facilitate investment.
“Manufacturing is imperative, keeping in mind employment concerns in India,” notes Ashok Jha, secretary of the department of industrial policy and promotion in the Ministry of Commerce & Industry, in a speech. Many of the 600 million labourers currently employed in agriculture will need to find jobs that suit their low level of skills.
Manufacturing is growing at around 9% a year, while consumer durables are growing at close to 15% a year. Indian industry can build on its expertise in textiles, steel, cement, telecoms, auto and auto components, biotechnology and pharmaceuticals. “We are becoming very cost competitive, even in manufacturing,” says Mr Modi. “We are exporting manufactured goods to China: chemicals, engineering [products], auto components, electronic goods. Bilateral trade with China is worth $13.6bn from $1bn only in 2000 and is one of the few countries where we have a trade surplus.”
In terms of exports, the end of the multi-fibre agreement represents a great opportunity for India as long as the inflexible labour laws can be circumvented. The government, in effect, did this by agreeing the creation of special economic zones, which will benefit manufacturers in other industries as well.
Contract market
In pharmaceuticals, India is already the fourth largest producer of medicines in terms of volume. It has the largest number of pharmaceutical plants approved by the US Food and Drug Administration (FDA) outside the US and is set to benefit from the contract manufacturing market, due to grow to $900m for Indian companies by 2010, says Pratyush Sinha, secretary at the department of chemicals and petrochemicals in the Ministry of Chemicals and Fertilisers.
The introduction of a product patent regime in January this year means foreign manufacturers will feel more comfortable contracting out production to local companies staffed by highly qualified but cheap graduates.
This, of course, is India’s great advantage: an educated, growing workforce cum consumer market.
“In another maximum five to seven years, you will find India has one of the largest consumer markets. The purchasing power is something amazing,” says Srichand Hinduja, chairman of the Hinduja Group.
India’s educated workforce also means the government’s aim of doubling the country’s share of world trade in four years does not seem farfetched. Trade is only 10% of GDP. Companies like Moser Baer should help close the gap.
Brandbuilding call
But as Narayana Murthy, chairman of the board of Infosys, told The Banker: “Today the Indian IT industry is predominantly focused on cost, and, as a result, faces the danger of commoditisation. The industry must invest in brand-building and work towards offering more varied services and end-to-end solutions to clients.”
He also notes that with an average investment of less than 1% in research and development, Indian IT companies need to close the gap with foreign competitors through innovation networks between institutes, IT companies and research firms.
Whatever the importance of manufacturing, many believe services will continue forging ahead. Subramanian Ramadorai, chief executive of Tata Consulting Services (TCS), India’s biggest outsourcer, is adamant services will remain the most dynamic sector of the economy over the next 10 years: “Absolutely. Unquestionably. No doubt.”
The company, with offices all over the world, listed in Mumbai last year via the biggest IPO in the country’s history. It seeks to grow organically and by acquisition, so the second half of the year could well see a foreign listing in order to gain an acquisition currency.
Foreign acquisitions also make sense for outsourcing companies seeking to deal with the political backlash against the process in the developed world, especially in the US.
“There are two views in the US.The view which must prevail is that every dollar outsourced is a saving of 20 cents which generates jobs,” says Mr Nath.
Public/private talks
Like many of the large companies in the private sector, TCS is very involved in talking to the government about requirements for the industry and the country. The very productive dialogue between the private and the public sector has been a feature in the past decade but appears to have stepped up a pace under Mr Singh’s government.
“Without a question, without a doubt the government listens to the private sector,” says N. Srinivasan, director general of the Confederation of Indian Industry. “[In 1991] we called on him the day after he took office. There is much closer interaction now and he has set up institutional mechanisms.” This includes the Investment Commission, headed by Ratan Tata, chairman of the powerful Tata Group, to attract foreign investment and the Council on Trade & Industry.
“We have the paradox in India that 50,000 new cell phones are sold a day but 100,000 villages have never heard the ring of a telephone bell,” says Minister Nath.
It is an overwhelming challenge for this government to have all Indians benefit from the constant reform impetus. Government funds are not the answer, when the central and state government deficit is near 10% of GDP. The solution is to get the economy moving faster than the current 6.9% a year increase in GDP.
“We cannot have a country where the left arm is healthy and the right arm is not. The key is growth. If we can grow at 8%-10% instead of 6%-8% then the change to government revenues will be so dramatic,” says Mphasis’s Mr Rao.
“Growth is not 8%-10% now, so few people are getting out of poverty and you are stuck in a trend of fiscal shortage.”
Dealing with the 28% of the population that lives on less than $1 a day and bringing the benefits of liberalisation into the villages will take time.
Speaking about banking reform, Mr Nath says: “Liberalisation has to be calibrated and continuous, rather than a leap forward, and meet economic logic and social concerns.”
The same is true for all the reforms the government is focused on. With some, the advances are already obvious. With others, like combating poverty and ensuring a more inclusive development, only time will tell whether this government and successive ones can juggle all the balls, but the indications are positive.
Perhaps there is a lesson from the brouhaha in the Lok Sabha. After the members of the opposition had noisily made their point about the state elections, they and the members of the government filed calmly out of the building, chatting to each other – messy democracy at its very best. INDIA’S SKILLS ADVANTAGE The world’s largest single-site optical media production centre in Greater Noida is a model of Spartan cleanliness. Covering 100 acres a couple of hours’ drive from New Delhi, it works 24 hours a day, 365 days a year to produce 2.4 billion CDs and DVDs annually for 11 of the 12 global brands, including Hewlett-Packard and Imation Corp; 1500 workers cover the three shifts. This is only one of Moser Baer’s five plants in India. Established in 1983, the company has become the third-largest producer in the global optical storage media industry by leveraging its ability to recruit a cost-effective, highly-skilled workforce and overcome impediments native to India. Of its 4800 employees, about 70% are graduates. Despite the high level of mechanisation of the processes, as evidenced in the vast Greater Noida plant, the staff necessary to sort out problems, run the complex processes and innovate, need to have a high level of skills. “For most of our competitors, personnel are about 15% of costs versus 3% for us,” says Ratal Puri, the 33-year old executive director of the company with a degree in computer engineering from Carnegie Mellon University in the US. The family-owned company is listed in India and has placed Global Depositary Receipts. Private equity houses Electra Partners and EM Warburg Pincus are shareholders. Mr Puri points out that the negative of India is its infrastructure: “The infrastructure is poor so we built our own 70mgw of power generation – not a business we want to be in.” Still, he notes that there has been a gradual improvement in communications over the past 10 years, with the result that even the ports, criticised by most manufacturers, have improved a lot; while the 2005 budget ended the railway transporter monopoly ensuring goods can be moved at a lower cost. It is not all good news. The roads are still so poor that the company will not use them to transport its goods. Moser Baer aims to continue being one of the fastest growing companies in India. It is looking to increase its global market share from 15% to 20%. This will be helped by the growth of the domestic market, where it has a 70% share.
