Wednesday, December 29, 2010

India as a Superpower by 2020: Reformist Policies Hold the Key

In my last blog post of 2009, I wrote that India could become a global economic power by 2020 if certain welfare and development plans were to be adopted. These were: (i) a billion homes program, (ii) food security, (iii) universal education, (iv) healthcare for all, (v) multi-modal connectivity, (vi) energy assurance, (vii) global scale of operations, and (viii) innovation within a generic mindset. These are long term strategic journeys with tremendous funding and execution challenges, and it would be too ambitious to expect an immediate thrust.

Positives and concerns

That said, India in 2010 demonstrated some healthy progress and some worrisome constraints. From an overall economy point of view India not only emerged relatively unscathed from the global economic meltdown but also achieved a much stronger rebound in 2010. During the year, important actions have been taken to position education as a universal right and several reforms in the education sector are on the cards. The signing of the Nuclear Energy Bill has opened up new possibilities in the energy space. Indian companies have pursued the vision of global scale operations. Those Indian companies which made ambitious overseas acquisitions (eg., JLR by Tata Motors and Corus by Tata Steel) demonstrated the ability to successfully turnaround the acquisitions and integrate them. Indian firms continue to make overseas investments in the mining, oil and gas and telecommunication fields. Yet, against these few decisive moves, there has been relative inaction on other fronts.

Governments, central and state, are yet to embark upon a massive affordable funding program, which is essential for broader socio-economic vitality. Healthcare continues to be patchy and highly inadequate. Infrastructure continues to be the biggest bottleneck for economic development. While a few companies began turning out innovative indigenous products, India is far from being an electronics product innovator as Korea is or an electronic product manufacturing hub as China is. Agriculture continues to be ravaged by vicissitudes of nature. As an overall phenomenon, innovation is yet to make a mark in terms of competitive efficiency and product differentiation for India in the global markets, commensurate with India’s talent potential.

Potential clearly recognized

Despite the mixed record, India enjoys tremendous goodwill as the economic powerhouse of the future. Reputed journals such as Economist have forecast that India would be amongst the world’s 5 largest economies in the world by 2030. Experts also believe that the gap between China and India would substantially be bridged with greater foreign direct investment into India and more sustained economic growth. Evidently, with China having already built up its industrial and infrastructural strengths to nearly peak levels and India having substantial strides to take on this score, there is clearly a tremendous potential for India to up the ante of development.

While such perceptions of India’s growth are morale-boosting, India cannot be complacent given the fact that the constraints it faces are real and the resources it needs to marshal are enormous. To that, we need to add the fact that the two other BRIC countries, Brazil and Russia, have a new found appetite for rapid growth. India clearly needs to have a more pervasive yet more focused strategic economic plan to achieve the global powerhouse status.

While the eight points mentioned in my last year’s blog post, and recapped in the introduction to this post are valid, the developments of 2010 point to certain new opportunities that should be leveraged aggressively and chronic constraints that need to be eliminated resolutely. For the first time, India has the option and opportunity to leverage its unique democratic institutions and geo-political positioning to reinforce its economic and industrial strength. The future lies in reformist policies to be conceptualized and executed on a wide canvas.

Global collaboration

The first part of the reformist plan must be to leverage the interest and focus that various advanced economics have developed in India. The year 2010 saw the heads of almost all advanced nations, USA, Russia, UK, France, Japan included, visit India and explore a wide range of economic and business ties. This interest opens up several possibilities for widespread industrial and economic collaboration in nuclear power, thermal power, aerospace, defense, rail transportation, airports, and several other investment and technology intensive sectors. India should be keen to convert these proposals into active projects both in public sector and private sector domains. The Government should encourage public sector and private sector enterprises to diversify actively into these new areas, with the added promise of India providing low cost components in exchange for overseas technologies.

Coordinated policies

Much as private sector is destined to play a larger role in economic development, Governments have to exert themselves to draw up more cohesive reforms agenda with strong cross-sector linkages. Though there were no major reforms initiatives in 2008 or 2009, the Indian economy has grown significantly. The growth rates with a proper reforms agenda would be even more incredible. Policies balancing industrial needs and environmental compulsions simultaneously, rather then sequentially, are one important requirement, for example. Without such coordinated policy framework several mega projects that are planned, are failing to really take off.

Public oversight

On a related plane, stable and investor-friendly long term policies on Special Economic Zones which create employment are also required. Policies regulating private operations in an open, transparent and positive manner constitute another important need. India is perhaps not yet ready with the level of perfect market conditions that allow a totally free market economy to operate without a concern of wayward deployment of scarce resources. Even highly free market countries such as US are now veering round to the view that certain economic activities of strategic importance need larger governmental oversight. Banking, finance, healthcare, insurance, and education for example, need public policy oversight as much as private sector participation. Microfinance in India, as an illustration, has ushered in a silent revolution by financing USD 4 billion for empowering millions of indigent households. Yet, lack of regulatory oversight has led to multiple failings in this revolution, setting the clock back. Great private initiatives should not, therefore, be allowed to become exploitative for want of appropriate public oversight.

Skill enhancement

The average age of India of the future will be less than 30 years. This means that educational and skill levels of the Indian population will have a great bearing on the competitiveness of the country. While engineering education is the lead component of India’s industrial growth with a vast network of colleges, thousands of seats are lying unfilled in engineering institutions. Perceptions of inadequate depth, patchy quality and low opportunity for certain educational streams are at the core of this paradox. This concern is accentuated by the fact that factories and infrastructure in India are at peril with the migration of engineering talent to softer areas such as IT, banking and consumer marketing. The position is no different in science and medicine. Despite the acute lack of medical care, the admissions to medical colleges are highly inadequate and regimented. Scientific institutions are unable to marshal resources to specialize in research driven scientific education. India’s educational sector is clearly in the need for a massive opening up with public and private funding.

Global scale funding

Juxtaposed against the massive growth needs, especially in long lead industrial and infrastructural projects, India perhaps is just not resourced adequately to fund the growth. The Indian banking sector is still introverted, for good and proven reasons. However, scales of operation are not commensurate with the global fund raising requirement for the envisaged infrastructural and industrial development. On one hand, infrastructure alone would call for an investment of $ 1200 trillion to get to global standards which the current banking sector is incapable of addressing. On the other hand, the Indian banking system seems to be more comfortable with, and geared towards, financing quick-payback industries, retail, white goods and other consumption sectors. A sea-change in the banking infrastructure would be called for which can only occur with dedicated policy support.

Equitable employment

Economic employment with a human face will be yet another facet requiring policy support. Indian homes are typically constructed by homeless, migrant workers representing a major social and economic paradox. Construction companies and the less literate labor force are continuously seeking cost and location arbitrage. Skill levels in construction and infrastructure development need to be upgraded to global standards which would require completely new vocational education policies for the underserved sectors such as construction, logistics and transportation. These sectors must be choices made by jobseekers out of dignity of labor and primacy of skill rather than resultants of lack of education forcing such low cost job seeking. At the same time, even in globally networked industries such as business process outsourcing, the Indian workforce is facing new challenges from relatively more stable and better educated call centre workforce of other Asian countries. With the Indian population itself touching 1.6 billion by 2020 with a mean age of 29 years, creation of a high level of skill base is essential to retain the competitive edge in both internally focused industries (such as infrastructure) and externally networked industries (such as outsourcing).

Reloading the governmental matrix

Indian governance is highly matrixed, with central and state governments and multiple political systems being in power. Focused identification and elimination of policy constraints is therefore essential for speedy progress. While everyone understands that major projects in highway development, urban decongestion, metro and intercity rail development, airport expansion and sanitation are called for neither inter-state or centre-state collaboration has been forthcoming in the requisite measure. This is often leading to long delays in conceptualizing and executing development projects. Standing committees on centre-state and state-state cooperation with the objective of clearing infrastructural projects on fast track could be one expedient way.

Software lead

India has the potential to surprise the world in a few aspects. Conduct of elections in this vast country with electronic voting machines is no mean task. An advanced country such as US has also been unable to accomplish such task. Soon the Unique Identification Number (UID) project will be another feather in the cap for Indian software sector. These skills can be leveraged to develop global businesses of digitizing governance in various countries of the world. Constantly discovering new processes of working with and around digital machines will be an opportunity for the Indian software and telecom sectors to leverage.

Thrust products

Countries have discovered that while broad based industrial development is vital for overall competitive efficiency, focus on a few selected industrial products often enhances the level of competitive efficiency and takes economic development to a newer level. India itself has discovered this fact with its focus on steel production, defense production and automobile manufacture in the last few decades. Dedicated efforts to develop new design and production hubs in nuclear energy equipment, solar energy panels, wind turbines, bullet trains, aircraft, space equipment, telecommunication equipment and electronics equipment, including mobile phones, tablets, note books and desk top computers could catapult India into global manufacturing league in a big way.

New product segments for the new era

A great trigger for India’s future development is the young age of the population, constantly increasing middle class and the consequent opportunity it affords for a whole new set of consumer items ranging from readymade and processed foods to personal products. Explosive growth may also be seen in future for equipment that automates household routines. The penetration of microwaves, multi-purpose cooking equipment, dish washers and washing machines could catapult, with these equipment becoming a standard feature of each dwelling unit in future. India could indeed see a revolution in the food processing and packaging industries as well as in the over-the-counter nutritional product and pharmaceutical industries. Indian firms need to pursue new business models that are not merely replicas of the past product lines but focus on newer product lines that would cater to the upcoming generation shift and income expansion.

Products for the BOP population

That said, India will never be free from the challenges and requirements of finding economic, low-cost solutions for those living at the bottom of the pyramid. Professor C K Prahalad, in his landmark book on Fortune at the Bottom of the Pyramid (BOP) has described how healthcare products and services could be economically and successfully offered for India’s population. Indian companies need to develop a BOP line for each product segment, be it a household item, a personal product or a consumer good item, all the while emphasizing high utility and low cost. Hindustan Unilever’s and Tata’s low cost water purifiers, Pure It and Swatch, and GE India’s low cost ECG machine are indicative of the potential of this approach. Eventually, large companies may focus on designing and development as well as marketing of such low cost products enabling small and medium business enterprises to manufacture such products as part of an efficient value chain.

Growing capacity, compressing breakeven

From an economic analytics point of view, India’s emergence as a global power in 2020 would depend on a massive capacity expansion in all product and service lines, with highly granulated and suggested offerings to different customer groups. This needs to be accompanied by design, manufacturing and marketing paradigms that bring down the breakeven levels of operation. This would ensure that the economy as a whole remains viable and sustainable in lean times even as it maximizes its potential in good and booming times.

Goodbye 2010 and Welcome 2011!

Posted by Dr CB Rao on December 29, 2010

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