Indian Economy 2013-18: Expectation Economics or Execution Economics?

Over the last twelve months, India has seen its growth rate halve, from 10 percent to 5 percent, and industrial output contract to as low as 2 percent. Current Account Deficit has widened, Rupee has lost as much as 10 percent in a span of just 10 weeks, with a further 10 percent slide forecast over the next 10 weeks. Foreign direct investments (FDI) have stalled while the Foreign Institutional Investors (FIIs) have pulled out billions from the Indian stock markets. Inflation has been persistent even with liquidity getting squeezed. India, Inc has been reporting lower profits, and in some cases lower revenues too. Some of the aura surrounding India as the potentially the third largest economic power is getting eroded.

Certain industrial sectors are particularly relevant for reading the strength of the Indian economy. Realty, power, capital goods, metals, and oil & gas sectors have fared poorly over the last five years, with the stock market indices relating to the sectors plummeting by 90, 70, 67, 60 and 37 percent respectively. Important sectors such as consumer goods, banking and technology have remained flat. The only sectors that have recorded growth are FMCG, healthcare, automobiles and IT at 182, 103, 80 and 70 percent. Within these, automobiles and information technology have seen fluctuating fortunes in the last three years.  Recent physical numbers of performance indicate a clear deceleration in these sectors while IT’s performance is linked to dollar appreciation vis-à-vis Rupee.

Lagging economics

The laws of industrial and consumer economics typically operate with a lag. The high performance of domestic consumption oriented sectors does not necessarily reflect long term sustainability of domestic demand and consumption. On the other hand, the languishing of realty, capital goods, power, shipping, metals, oil, gas and other infrastructure sectors indicates that sustainable investments are not being made to support a healthy long term supply and consumption profile in the Indian economy. Simultaneously, the inability to keep continuously developing newer bases of competitive manufacture such as electronics, semiconductors, solar panels and systems, telecom gear etc., limits the country from continuously generating domestic investments and drawing foreign investments. China’s massive thrust on infrastructure has been well accompanied by competitive manufacture of all industrial and consumer goods.

The macroeconomic balance of any economy is governed by the positive trade balance, flow of foreign investments, domestic savings and investments, and current account balance.  Looking back, we can identify post-liberalization of 1992, two distinctive five year cycles: 2003-08 and 2008-12 which saw Indian economy climb up to new tracks, despite the striking global liquidity and bankruptcy crisis in 2008. These cycles were marked by high rates of growth, increasing foreign investments, high inflation in parts, high fiscal deficits, steady increases in manufacturing output and volatility in infrastructure development with some highs and lows. One would expect the Rupee-Dollar parity to exhibit volatility under the circumstances over the ten year period; but it did not. The exchange rate (Rupee to Dollar) remained steady at about Rs 45.6 during the ten year period. Some underlying contradictions did exist which are now coming to the fore.

Expectation economics

Reviewing the past decade of 2003-12, one may wonder whether the macroeconomic stability of India was a result of a peculiar phenomenon of expectation economics, globally as well as locally. The last decade, for example, has been an era when the mighty economies of the world, USA, Japan and Europe, and their respective mighty currencies Dollar, Euro and Yen became structurally weak. This was also the period when the concept of BRICS economies (including India) came to the fore as the drivers of a future global economy. There was also a well deserved all-round admiration for the way India managed its banking and liquidity system in sharp contrast to the meltdown in the USA and Europe. Huge expectations had built up as a consequence that India would be the future market for industrial and consumption growth.

It was, therefore, not unnatural that what should have been an intrinsically weak Rupee for the reasons adduced in the previous section above maintained its parity as a stable currency. However, the moment the economies of other nations started perking up and the expectations of India started turning tepid, the fault lines in the Indian economy have begun to show up in recent times, as discussed in the opening paragraphs. The lessons are clear that while India has all the right ingredients for becoming an economic superpower such as its large 1.3 billion population, growing middle class, youthful demographics, increasing literacy and reducing poverty, there must be a growth oriented macro and micro economic regime to harness the resources.

Incremental economics

When macro-economic and micro-economic fundamentals are under threat, incremental measures would hardly suffice. Discouraging consumption of gold (through increase of duties), tightening of domestic liquidity (through bank liquidity ratio controls), curbing conspicuous consumption (through taxing of luxury goods), facilitating foreign investments (through relaxation of certain FDI caps) and buffering against hard landing (through subsidy and security options) can at best be palliative measures. They do not address the basic infirmities or weaknesses of the macroeconomic situation (for example, balance of payments, short term and long term debt and microeconomic situation (for example, industrial costs, prices, output and consumption).

The perils of incremental economics are that governments end up undertaking corrective measures too little and too late. As a result, problems become crises. The near bankruptcy India faced in 1991 is an example of delayed transformational moves. While everyone considers 1992 as the year of inflexion in terms of transformational economic liberalization in India, there can be no denying that India has been taking partial measures of liberalization even from the 1980s but they were just not enough. A large complex economy like India needs transformational economics when faced with problems that could turn into crises; it is true now as much as it was in 1990s. India traditionally had a strong consensus for weak reforms. In the context of the several years of liberalization further dramatic liberalization policy changes as in China could be a challenge for India.

Competitiveness economics

India has its contradictions; fundamentally the people want to grow and prosper but at the same time, people are patient and tolerant of low or even no growth. The larger base of population, at the base and the middle of the economic pyramid, is less knowledgeable about the benefits of further liberalization versus any other way of economic management. In fact, there continue to be many misconceptions about liberalization which is equated to the opening of the Indian economy to “foreign domination”. As long as Indian polity is fractured it is unlikely that total liberalization as a concept will have open advocates.  It is critical that the importance of competitiveness, as opposed to liberalization per se, is taken up as the primary economic concept. The purpose of liberalization, after all, is competitiveness.

India must focus on sector competitiveness as a panacea for economic ills. For example, if India becomes a global leader in design and manufacture of jewels for global markets and becomes a net foreign exchange earner, it would probably not make a difference even if the country imports gold and diamonds. The same would apply to other sectors as well; if import of certain technologies makes India globally competitive it is a path worth taking. Competitiveness, however, requires an enlightened mindset on the part of employers and employees. The best intentions can go awry if competitiveness is equated only with shop floor productivity as painfully brought out by the unfortunate incidents at Maruti Manesar plant. Competitiveness must create new jobs, enable better living conditions and ensure greater prosperity for all stakeholders.

Execution economics

Competitiveness is a function of design as well as execution. The Indian Finance Minister is on record that China’s execution capabilities are indeed enviable. Timely and rightful execution of policies and strategies, whether liberalized or not, adds more to competitiveness than a perfect liberalization policy or strategy. In formulating policies, the end point of economic growth with social equity cannot be lost sight off. It matters less whether bullet trains are set up in India with indigenous technology or imported technology and domestic or foreign investments, or a combination thereof compared to whether the bullet trains would be set up at all. Not ensuring exceptional connectivity with such transformative transport option that is also capable of generating several thousands of new jobs is poor execution economics, and denies the country the benefit of competitiveness economics.

The above is not to imply any preferential statements in favor or against dependence on foreign capital and technology flows vis-à-vis self-reliance through domestic investments and indigenous technologies. Amongst the Asian Tigers, Singapore has succeeded immensely based on the former while Korea became a leader based on the latter. For a large country such as India with several natural resources and intrinsic capabilities, the Korean model of development of its own fast-follower and pioneering technologies as the foundation for creating globally competitive industrial superstructure is probably more relevant. Korea represents an impressive model of execution economics. India would have much to gain if investments are directed into the infrastructure sectors which have seen de-growth and competitiveness is enabled through technological competencies and execution promptitude.

Posted by Dr CB Rao on August 10, 2013          

From Incremental Growth to Breakthrough Development: A Paradigm Shift for Indian Economic Planning

Post-independence India has been a pioneer in establishing a cycle of five year national economic planning which spelt out a strategic approach to allocation of resources by the Central and State governments on various projects, including their execution and review by various governmental agencies. The five year planning process is managed by the Planning Commission. Starting in 1951, the five year planning process has so far seen eleven cycles, with the eleventh five-year plan (2007-2012) having just concluded. The economic planning process has been helpful for the Indian economic planners in the socialistic command economy regime that prevailed till 1992, the year of economic realization which ushered in massive increase in private and foreign investments. From a total budget of Rs 23,560 million that the first five year plan entailed, the plan budgets, central, states and union territories, steadily grew over the decades to reach Rs 36,447,180 million, constituting nearly 14 percent of GDP.

Despite the steady growth in the profile of financial investments under the economic planning process, the economic growth and infrastructure development have failed to lead the kind of quantitative and qualitative development that are required of India’s emergence as an economic superpower. One of the reasons could be the anxiety of the Planning Commission to view egalitarian issues through economic lenses and vice versa. In the eleventh plan document spanning 386 pages, only 11 pages were devoted for infrastructure development while thematic issues such as employment, social justice, innovation, technology, spatial development, regional imbalances, environment, climate change, governance, consumer protection and competition policy were covered in about 200 pages. This cannot be faulted per se; probably needs to be even welcomed as the Commission’s commitment to inclusive growth. Without getting biased by the current planning paradigm, however, we need to analyze why the economic planning process is yet to deliver resoundingly for India an assured measure of global competitiveness across the board and a quality of life that is sustainable even for indigent sections of the population.

The long project cycle

Economic planning for a country is not the same in scale or scope as strategic planning for a firm. It may be appropriate to visualize a firm’s transformation in five year cycles but it is probably inadequate to visualize an economy’s progress in five year cycles. The fundamental lacuna in India’s economic planning process relates to the incremental visualization in steps of five years. Some State governments have, in fact, been quick to recognize this and launch 10, 15 or 20 year visions. A durable framework for strategic economic development and asset creation can emerge only when the central and state plans are synchronized in a much longer time frame of at least 10 to 15 years at least. The strength of today’s developed world would lie in their development of infrastructure projects that would take a decade or two to build but would last several generational lifetimes. Whether it is the labyrinth of highly intricate and synchronized underground and on or over ground metro rail systems of Tokyo and London or the elaborate national and state highway systems of the USA, the ability to visualize breakthrough projects of benefit for future centuries is the hallmark of enlightened economic planning.

Given India’s aspirations, and potential, for emergence as the third largest economic power, planning cycles have to be reasonably long. This, coupled with the fact that public sector and infrastructure projects in India are beset by significant delays, dictates the need for planning with at least a 15 to 20 year planning horizon. It is not unusual in India for projects taken up under the aegis of a five year plan remain not only incomplete at the end of the five year plan but also found to be insufficient in the context of population and economic growth dynamics. Airport modernization in the four metropolitan cities is a classic example of development being too little in scale and scope and too late in completion, and necessitating in all cases the need to commence work on new airports. The advantage of a really long range planning framework is that economic projects which are to meet the requirements of future generations are conceived with appropriate scale and scope as well as investment, and understanding of the payback periods.

Incremental versus breakthrough

In economic planning of developing economies which requires allocation of scarce resources on a number of conflicting priorities across urban and rural spectra it is easy and even often compelling to spread resources on projects that meet pending needs, not even current needs. Incremental growth, which mostly is also inadequate often, is the usual prescription. The golden quadrilateral of highways is a good example of how long term planning can create economic assets useful for generations. Yet, when it comes to bullet trains not more than two inter-city sectors are being considered as opposed to the need for a national bullet train grid which could dramatically transform the social, industrial and economic connectivity in this vast nation. There are several areas which lend themselves to the incremental versus breakthrough dilemma, with ideal choices needing to be in favor of breakthrough development. Examples abound not only in infrastructure like roads, ports, airports, railways, airways, shipping and highways but also in social sectors such as healthcare, education, irrigation, public distribution and housing, to name a few.

Breakthrough development requires, fundamentally, modeling of future population and demographic trends and economic parameters that can support the GDP growth targets in time spans ranging from ten to twenty years. In the healthcare sector, for example, the current network of government run general hospitals would be grossly inadequate when the rapid extension of metropolitan areas is factored in. Breakthrough development would require not only doubling or trebling of bed capacity in the existing general hospitals but also potentially setting up of at least four new general hospitals in each of the northern, southern, eastern and western peripheries of each expanding city. Similarly, each of the economic and social infrastructure sectors requires breakthrough concepts. In the infrastructure area, projects must be set up to lead economic and social development. In the field of ports, for example, it could be setting up of a port for every 200 kilometers of coastline. In the field of education, for example, it could be a Kendriya Vidyalaya in each town, an institute of higher research in each state and as many IITs and IIMs as there are states of India.

Breakthrough is a mindset

Breakthrough is essentially a matter of mindset. I can recall a day two decades ago when I was asked to mention, as a strategic planner, what I would do to reverse the low market share position in truck segment of my firm. I said that the firm should offer air-conditioned factory built cabs. Obviously, the suggestion was received with shock given the reluctance of the firm to be able to offer even a front-end structure. Today, twenty years later, most truck majors are willing to offer fully-built trucks with air-conditioned cabs as a competitive offering. In a similar manner Volvo rewrote the nature of inter-city passenger transport diligently over two decades through its high performance buses. These are just two examples of how proactive and innovative mindset would advance progress through breakthrough concepts. Planners, in terms of choices, may simply wonder at the amazing progress of Tokyo, Shanghai or Dubai but conclude it as inappropriate for India, or create our own tapestry of Chinese type urban development and Japanese type rural development. Whichever route is taken, it is the passion and commitment of the decision makers to progress that determines how differentiated the future would be.

An essential component of the breakthrough mindset relates to the deployment of advanced technology and innovative ways of execution. India has been a pioneer in the use of electronic voting machines in the highly spread-out national and state elections, at a global level even compared to advanced nations. India has been implementing a project of ensuring a UID to all of its 1.3 billion plus population, which are no mean examples of deploying technology. This progressive mindset with interconnectivity across all regions and sectors needs to be deployed in all aspects of infrastructure. Given the will, superior technology with lower costs can be achieved by India. The CEO of Renault-Nissan, for example, had gone on record that he had come to establish car manufacturing plant in India not merely for market but more for the capability of engineers to design and engineer modern projects at lower costs. This competitiveness should be applicable to a host of sectors as well. There should be a technology planning cell as part of the planning commission infrastructure in India to be able to integrate technology in national projects.

Collaboration is the key

Epoch-making transformation needs total alignment in the national setting. It is not sufficient to conceive of individual projects and hope that they would deliver as uncoordinated initiatives by Central or State governments and in public sector or private sector. Spatial planning, connectivity planning, services requirements analysis, and infrastructure development must be undertaken as a prior condition of any development. If political and regional differences are overcome asset creation of the best standards can take place to cater to the needs of current and future generations. Collaboration should also include arrangements with foreign governments and entities to bring the best of technologies and processes as well as expertise to India. Policies related to induction of the best of technologies in uncovered sectors such as airways, retail, insurance, and several other infrastructure sectors need to be formulated.

Moving from incremental growth to breakthrough development requires all-round collaboration amongst all stake holders. The first step is to move from a five year planning concept to a fifteen year (if not a twenty year) planning concept and also expand planning commission as a collaborating body of all stakeholders, central and state governments with expert support from public and private sector corporations and linkages with new technologies and expertise of whatever origin, not found but required in India. In doing so, however, the dilemma would be the classic choice between centralization and decentralization of planning. From the perspectives of the big picture visualization, strategic direction, center-state coordination, integration of technologies, resource mobilization and allocation, external collaborations, definition of strategic projects and thematic goals centralization is required. From the perspective of state level value propositions, detailing of projects and their execution, people and skill development, leading social infrastructure and customizing various initiatives to the specific needs of the individual states, decentralization would be required.

Posted by Dr CB Rao on July 8, 2012

Give Me The Space; Get You The Living

In the realms of human living, space and time are two inexorable points of differentiation. Space is given by destiny, in that the first place of living is not by choice but by birth. Thereafter, of course, it is a huge expedition for an individual or a family to seek space for living wherever appropriate and possible. In that sense, it is destiny's way conferring an initial advantage or disadvantage, and the human being's ability to manage the advantage or disadvantage. Time, on the other hand, differentiates no one, initially or at any point in ones living. It is entirely up to the aptitude, enterprise and will of the individual how he or she manages the finite and priceless resource of time. The place one has the capability to provide certain advantages of time and cost.

Not surprisingly, in the realms of corporate living too, space and time emerge as the two most critical factors of destiny. Depending on where the entrepreneur is borne or where the first enterprise is set up, each company secures certain basic competitive advantage or disadvantage. It is up to the corporation as it grows older to manage its location specific opportunities and constraints. Similarly, the company needs to understand how it utilizes the factor of time to its advantage. For corporations, as much as for individuals, time and timeliness are two sides of the same coin but have completely different impact. Doing things slow is not generally a good thing for corporations in the competitive world of business while doing things fast but at inappropriate times is not necessarily good either!

Space-location-time-cost linkages

Industrial and business society has for long viewed space as the essential asset to start an industry or business. Governments and companies have imbued or sought greater value from space through location (developed or underdeveloped) and location related incentives. Advanced countries as well as emerging countries have traditionally adopted similar strategies for industrial and business development. Central to such strategies has been provision of large tracts of land for setting up industrial plants or business parks, coupled with fiscal and tax subsidies and incentives. Emerging countries, more specifically India, followed a policy of prohibiting major industries in and around cities and inducing them instead to move into backward areas.

In recent years, however, the importance of social infrastructure in attracting talent to industries in backward areas has been recognized. Companies which set up industries in backward areas struggled with the adverse time and cost effects of establishing housing, healthcare and educational infrastructure in such areas. That said, certain industries have to be set up nearer to natural resources and where population levels are thin while information technology and back-office firms are inclined to be nearer cities. However, the distinct preference for larger and larger tracts of land, whether in rural or urban areas seems to be causing significant agrarian and tribal unrest and leading to skews in real estate costs. As a result, even the apparent beneficiaries of modern development are questioning if the development is not inducing also a huge cost push in terms of housing and other social infrastructure costs. This trend does not seem to abate.

GDP-land index

Probably, the time has come to examine the concept of productivity of land. Historically, there has been no correlation at the country level between the land area and the gross domestic product. An analysis of the top 20 countries ranked by GDP shows that the index of GDP to land area shows a scattered pattern. Japan, despite being a very small country, has an index of 15 while the US has an index of only 1.5, China 0.61, Australia 0.16 and Russia 0.09. Even India has a higher index of 5.5. Several European countries such as the UK, France, Italy and Germany as well as South Korea approximate the axiom of lower land mass positively correlating with higher GDP. Clearly, having a large land mass or even being home to natural resources (eg., Australia or Russia) provides no assurance that such countries would automatically be wealthy or rank higher in GDP.

A review of countries with favorable GDP-land index shows that factors other than land area play a major role in the GDP levels. Firstly, it is technology that enables a country derive its true and optimal gross product from industrial or business investments. Secondly, it is the ability of the country to manage its import-export flows that determines the level and sustainability of its gross product. Thirdly, it is the talent stock of the people that enables the nation to generate value and wealth. In all these cases, smaller countries such as Japan and South Korea as well as Israel and Germany have demonstrated that the above three factors, rather than the size of the nation determine the national productivity and competitiveness. The keenness shown by the industries and governments to seek and provide hundreds and thousands of acres for industrial and business activity needs some discussion and debate, given the opportunity cost of the finite resource that land is.

Ease of management versus productivity of land

It is understood that in India information technology companies seek anywhere between 50 and 250 acres for new green-field IT projects while automobile companies seek 1000 and 3000 acres for new green-field automobile projects. These numbers compare with more humble spatial needs that prevail abroad. Managements seek large parcels of land at the initial stage itself to address the expansion needs of the future, to avoid cost escalation impact of incremental land acquisitions, and to retain a common management and technical team for expanding scale of operations. These valid reasons have to be juxtaposed against the broader public good that could accrue by seeking and providing land, just in time for expansion. More often than not, limits on business scale-up keep substantial parts of land unutilized. In several instances, managements themselves desire to move to new sites to reduce operational concentration and single site risk and also facilitate induction of new technologies and new practices.

If land were not to be a finite resource and the cost of land were not proving to be prohibitive, the whole concept of vertical development would not have occurred in real estate field. The government- mandated largesse of land for industrial and business purposes circumvents the market economics and artificially enhances ease of management and reduces productivity of land. If one were to leapfrog into the coming decades, lockup of land by individual corporations could act to the detriment of public good in the decades to come. While industrial units could have some limits in terms of vertical growth, back-offices need to be proactive in terms of land use optimization through high rise offices, with adequate safeguards against any hazards, including earthquake proof construction. It is forecast that urban skew is an inevitable global trend with 75 percent of population living in cities by 2050. Captive retention of thousands of acres of land would only accentuate urban living pressures.

Urban sprawl and vertical leap

Given the inevitable urban sprawl, some governments and corporations have resorted to unprecedented innovations in technology and engineering to build super-skyscrapers. Shard in London Shanghai Tower in China, Burj Khalifa in Dubai, Marina Sands Bay in Singapore and the new WTC blocks in the USA are examples of the new trend. The builders and the sponsors of such super-skyscrapers believe that these new edifices do not merely represent office space but represent ‘vertical villages’ and ‘lifestyle communities’, which are as good as sprawling horizontal urban communities. There are also trends of reclaiming land and rebuilding habitats to create new mini-cities or urban cities. The rebuilding of industrial land into civic residents and urban malls is indicative of the urban churn that could go on.

Urban land use planning requires addressing of the issue of urban slums, which are almost inevitably the first step for the rural migrants. Urban slums are also the first stops for construction and industrial workforce. Unless sustainable and affordable design and construction principles are adopted to enable affordable habitats to replace urban slums (with proportionate land allocation for such projects), the provision of hundreds or thousands of acres of land for projects could worsen the social skew even further. In the horizontal office expansion cum vertical residential growth model currently being deployed in India industrial and business land allocations and residential land allocations are typically made by different governmental agencies. It needs to be debated if this model is the right one going forward or needs to be replaced by an integrated township model where multi-purpose land allocations are made for industrial and business purposes as well as residential and civic purposes.

Fast forward to 2050 AD

If the current trends of industrialization and urbanization continue with locking up of large parcels of land, sustainability of growth could be threatened. Given that global population could reach 9 billion mark by then (from the current 7 billion), there could be significant consequences of continuance of the current land use trends. Governments may, in such a scenario, mandate return of all unused land allocations. Whether by public action or private pressure, struggling industrial facilities could be pulled down, the refurbished industrial areas could face rationalization, and the concept of township development could return to weigh on industrial and business sponsors. There could be a total urban renewal with IT enabled ecologically sensitive cities being built in the place of current haphazardly developed habitats. As the current wave of sponsors face scrutiny on the extent to which they have fulfilled their land utilization promises, additional perspectives could emerge.

The governments, central and state, formulate and implement several policies that impact land use patterns. These include policies to expand the metropolitan cities into megacities, upgrade tier 2 cities into metros, disperse industrial development, dovetail industrial and residential developments, eliminate urban slums, create new industrial corridors, promote special economic zones, establish new manufacturing zones, provide road, rail and air infrastructure, enable urban-rural balance, provide social infrastructure of education and healthcare, and provide access to water and power, among others. These policies impact how the available land is allocated and utilized. Optimal development would occur when an integrated approach is taken at national and state levels covering all the above policies, with the policies individually and collectively being synergistic in terms of value enhancement and cost minimization. Optimization of speed and time of travel would need to be a key goal of the integrated policy so that the society and economy remain productive.

Posted by Dr CB Rao on February 14, 2012

Public Policy and Industry Structure: Challenges and Opportunities

There is a considerable degree of misunderstanding on the scope and role of public policy in a global economy that is liberalized and provides the pride of place to free enterprise. Emerging economies such as India are prone to an even greater level of confusion on this, particularly in the context of controversies in the formulation and execution of various public policy initiatives. However, the role of positive and proactive public policy that guards the interests of society and spurs triggers development cannot be ignored. In many instances, public policy has been in the vanguard of changes that protect consumer interests. In the early years of India’s industrialization the ISI marking on industrial and consumer products and in the later years the Bharat fuel economy certifications for the automobiles are two examples of the Indian government mandatorily influencing the development of higher quality and performance norms on industries.

Governments, central and state, could, and need to, do much more to drive industrial change in India. There is, for example, a dire need to display prominently and scientifically, the ingredients, serving sizes and the nutrition values of all food products, whether they are manufactured by large companies or small and medium enterprises. This would enable a concerted move to curb the uneducated and uncontrolled drift of the population from nutrition to taste. In a similar fashion, mandatory development of easy-to-read pharmaceutical packages and introduction of package inserts for all pharmaceutical preparations could be steps that would ensure better patient safety. Public policy is vital to ensure that private enterprise in its quest for sales maximization and cost minimization does not lose track of consumer interests. Publication of data on carbon credits and other disclosure items by the companies also fall under the category of investor protection.

Transformative policy

At times, however, public policy can be transformative in its impact on social and industry structure. For example, the governments can decide that in the interests of passenger safety (protection against deep vein thrombosis) and comfort (for the young and the old alike), all airlines must provide flat-bed seats, irrespective of the class of travel, whenever travel time exceeds say, five hours. With thousands of planes flying on long distance travel and with bulk of the seats being for the economy class with constrained leg space, the drastic impact of such a policy prescription on aircraft configuration and capacity, and on air travel economics can be imagined. Such a policy prescription can affect the constituents of the broader air transportation industry in different ways. The aircraft manufacturers may face demand buoyancy as airliners may seek to order new aircraft to fulfill the new requirement. They may also be induced in the long run to develop new aircraft configurations that could provide flat-bed capacity throughout the aircraft without reducing seating capacity too much. The manufacturers may also experience a spurt in demand for larger aircraft such as Airbus A 380 or Boeing Dreamliner.

The policy prescription would impact the other constituents of the airline industry in different ways. The aircraft interior makers and seat developers would benefit from a huge demand spurt. Logistics and transportation consulting firms would have a major demand for analytics that optimize seating configurations between short haul and long haul flights as well as pricing and differentiation models. The airliners may face huge dis-economics of the policy change in terms of what the economy market segment could bear for the enhanced passenger comfort on one hand, and the possibilities of demand flux and migration across the economy class, business class and first class user segments. The society and the intellectual groups, especially in emerging markets, may react in a totally different way questioning the priority of the governments in ensuring passenger comfort in air travel when other transportation services such as road and rail are grossly inadequate. It is quite likely that emerging economies may have a positive backlash of similar structural reforms in other transportation sectors such as high speed bullet trains, full scale sleeper compartments and fully air-conditioned train and bus services.

Services, infrastructure and resources

As governments the world over quit manufacturing and ease the controls on the sector, they would focus more on services and infrastructure as well as physical resources. Policies on these sectors need to be positively disruptive to catalyze growth. In India, in particular, what are considered subsidies and election sops today could be essential social needs, in the years to come. From providing subsidized rice, governments may move towards low cost production of rice through better farming methods and yields. From providing laptops as an election promise, the governments may see the laptops and tablets as an essential investment in students to enhance the quality of students. As already contemplated, governments may enhance the duration of the medical course by one year to accommodate a one year rural stint. Governments may take upon universal medical care, universal housing and universal education as their responsibilities. Access to affordable and comfortable public transport may be seen as essential to ensure social and economic productivity. Road development may become a priority item. While all these may be seen to be taking away tax revenues, the overall economic benefit may outweigh the short term impact.

At the same time, societies and governments are likely to be vocal and interventionist in terms of natural resource utilization. Mining of coal and metals would be a contentious issue as industrialists and environmentalists seek to balance the conflicting imperatives of growth and conservation. Pricing of these resources may no longer be a matter between the private exploiters and the governments; rather it could be a matter of public interest with the courts also coming into play from time to time. Equally contentious would be matters relating to quality of air, matters of pollution, and utilization of scarce vital resources of land and water. Public policy in matters of resource utilization needs to be proactive to enable fair generation and optimal utilization of resources, rather than be ignorant of it for long spells of time, and then take draconian measures. Policies on fuel consumption and plastic and electronic waste are a few examples of the need for continuous and calibrated monitoring. While corporations may overcome domestic natural resource constraints through overseas acquisitions, governments cannot be oblivious to the geo-political impact of overseas acquisitions.

Public policy and industrial restructuring

Public policy leads to industrial restructuring from time to time. The US government’s fuel economy and EPA norms of the 1970s, promulgated in the wake of the first oil crisis, have caused complete restructuring of the global automobile industry, providing an opportunity to the Japanese automobile industry to leverage its unique fuel-efficient compact car technologies to achieve global dominance. It is not that public policy always constrains and restructures the industry. But for the support of the US government, General Motors would have ceased to exist after the global economic meltdown in 2008 and 2009. The private sector as well as public sector airlines in India are facing a situation of needing governmental support for bailout. However, it is a matter of debate if public policy should in the first place cause distress through either excessive freedom or excessive control, and then seek to remedy later. What constitutes proactive and prudent industrial management or reactive and casual industrial management in the face of unpredictable public policy has always been a grey area. Corporations have to necessarily structure their strategies anticipating volatile public policy shifts, especially in emerging economies.

In contrast, where public safety and health, resource conservation and environmental protection are concerned it would pay for the businesses to be ahead of the public policy curve. Many times, public policy comes up with requirements that challenge the industry. The pharmaceutical industry has instances of ePedigree solutions (required by the US government) or the 2D barcoding (required by the Indian government) adding new packaging and distribution requirements. Whether it is first PVC and now BPA free food grade materials or lead free fuels, those companies which are proactive in developing superior products ahead of public policy not only serve the society better but also secure competitive advantage. To be able to do so, firms must first consider public policy as a competitive input rather than collaborative enabler. The author of this blog post argued earlier that the theory of Five Competitive Forces propounded by Michael Porter needs to be expanded to include global liquidity as the sixth competitive force. It would be appropriate to consider the competitive pressure of public policy as the seventh competitive force.

Technology as a differentiator

Public policy does not of course happen in thin air. Many times it is developed based on technological developments that happen in different sectors, and in different countries. The way the pharmaceutical industry controls its aseptic manufacture stringently could prompt the governments to require hospitals to establish similar aseptic standards in their operation theatres and intensive care units. The technologies that are generated in research laboratories, many of which are either funded by the governments or owned by the governments, could trigger the governments to mandate the commercial application of such technologies. Elimination of cancer causing materials is one such example. As the seismic activity in different regions becomes unpredictable, governments may mandate that all builders must follow Japanese-type earthquake proof construction. Similarly, deployment of green building technologies or alternative energy concepts could become the rules rather than exceptions.

Firms must, as a corollary, never accept technological status quo as a strategy. Those firms which constantly examine the linkages between their products and services on one hand and the consumer and environment protection needs, and develop appropriate technological solutions on the other could be ahead of the public policy curve. Yet, it is amazing how industries get trapped within the technological, operational and business templates that have proved successful, and lose sight of the impending game changing public policy directives. Reverting to the earlier example of the aircraft and airline industries, it is surprising why the industry refuses to recognize leg space, let alone, sleeping comfort as the essence of futuristic aviation design. The automobile industry took several long years to discover the needs of the society for low-floor buses and hybrid vehicles. There is no reason why other industries should fail to see the wave of egalitarian design becoming an edgy public policy.

Opportunities, rather than challenges

Public policy provides to the industry as many opportunities as challenges. In fact, proactive firms may see more opportunities than challenges. To institutionally respond to this paradigm, firms must go beyond the strategy of higher allocations to R&D. Emphasis must be placed on channeling a certain portion of R&D expenditure towards more consumer and environment friendly technologies which could serve public policy more effectively. The attempt to develop Aakash tablet computer by India as an extremely low cost computer for school children is a perfect example. The tablet computer industry could, instead of trying an unending desperate attempt to compete with Apple, view the billions of school and college going students as the universe to serve. Agricultural scientists and food processing industries could align themselves to the needs of the public policy to provide low cost food grains through better technologies and farming practices. Those participants in education, healthcare, and housing sectors may examine how parts of their services portfolio could be aligned to public policy imperatives of universalization. Anticipating and proactively catering to public policy changes could vest in firms virtually unlimited market opportunities and significant competitive advantage.

Posted by Dr CB Rao on February 6, 2012

Desires and Aspirations; Wants and Needs (DAWNs): A New Sunrise for Egalitarian Economics?

Basic economics taught us for decades that the human needs and wants dictated the economic behavior of individuals, societies and nations. At the core are the definitions of human needs and wants. A need is something without which it is not possible for a human being to survive; for example food, clothing, housing and protection from nature. On the other hand, want is something which is nice to have but without which it is possible for a human being to survive; for example, television, car or smart phone. As a society develops and its economy grows, more of needs are taken to be automatically available, and more wants are perceived as needs that are to be sought after as essential for living. This also explains the differential economic behavior across urban, semi-urban, rural and tribal areas in a nation on one hand and between developed nations, developing nations and the underdeveloped nations on the other. The paradox of needs and wants, and the resultant economic behavior is that resources are limited in nature, and do not lead to unlimited fulfillment of needs and wants even as human needs and wants are unlimited in quantity and quality. At the same time, it is the rather unlimited nature of human needs and wants that pushes the envelope of economic development. Typically, as each need is fulfilled, the accent shifts to fulfillment of a better class of need and fulfillment of basic wants. Economics is a social science that deals with the production, distribution, consumption of goods and services and their management. Human needs and wants, and the economics are therefore clearly interrelated.

Within any nation, there tend to be three main economic sectors which comprise the public sector, which includes the government and the government owned entities, the for-profit sector, which is mostly private sector organizations, and the not-for-profit sector. The not-for-profit sector is also called the third sector, nonprofit sector, independent sector or voluntary sector. In India, the public sector has been playing a major role in fulfilling the "needs" of the society by providing such things as roads, schools and public assistance or welfare. The funds providing these services are typically largely in the form of taxes, and cross-funded through public debt and subsidies. The for-profit private sector generally addresses the "wants" of society by producing and distributing goods and services to a portion of the population based on demand. Demand is the ability and desire to purchase goods and services. If there is a high demand, the private sector will supply those wants. Some examples of what the population demands from this sector include products such as luxury cars, expensive restaurants, cosmetic alterations, and so on, and services such as insurance, marketing, service, advertising, banking, accounting, finance, and so on. Equity, debt, profits and dividends provide the growth and reinvestment possibilities for the private sector. The not-for-profit sector is mostly responsible for the "needs" of the society, provided voluntarily with corpuses contributed by government subsidies, tax breaks and funding from the private sector and high net worth individuals. While the organizational principles are by and large common across the sectors, the governments are motivated by a simultaneous need to serve and control, the public sector entities are burdened by a combination of commercial principles and social purpose and the private sector entities are fired by motives of stoking the demand, increasing production of goods and services, and enhancing market capitalization.

The Indian context

The Indian context is a classic crucible for the basic economics of needs and wants. Seventy percent of India’s population is rural and indigent on farming that is subject to vagaries of nature. Despite significant economic progress, over 25percent of the population lives in extreme poverty, living on a measly earning of less than Rs 32 (60 US Cents) per day, which is the government specified poverty threshold. Over seventy five percent of the population lacks access to proper housing, sanitation, education and healthcare, providing another telling index of poverty. In this scenario, the emergence of an affluent middle class and the conspicuous consumption of high net worth individuals further compound the inequities. Leakage of the various benefits and subsidies before they reach the poor defeat the purpose of well-intentioned government sponsored welfare schemes, and eventually aggravate the overall tax burden and public debt burden in the economy. Infant mortality, child malnourishment and micronutrient deficiencies are endemic. Some pockets of some States of India are said to be faring poorly compared to even the underdeveloped world. Viewed in a macro-perspective, the Indian economy is still in a phase which requires massive need fulfillment across the population geographies and strata. It is a paradox of the global order that in the developed world that wants are easily fulfilled and needs are assured for a great majority of the population while in the emerging countries even a minority of the population would require subsidies for subsistence while wants prove elusive for the majority of the population. Without harping on the causative factors, one may still see this as a great opportunity of economic development, provided production, distribution and consumption of products and services are equitably organized.

The Indian context is notable for the peculiar nature of public, private and non-profit entity objectives. The Indian socialistic model which was antagonistic towards the private sector and the so called big business from 1947 to 1990 saw to it that the government departments and the public sector undertakings (PSUs) got into production and distribution of industrial goods and consumer goods even as the private sector was limited from producing more goods and services for the general population through controls on licensing, equity and debt funding and technology imports. As a result, governments, central and state, could not invest as much as they ought to have in their primary areas of responsibility of social services and infrastructure, and also by default, through the control and command economy model, limited employment generation, technological modernization and demand globalization. Given the skew in public-private participation the non-profit organizations had to move into core areas of social services rather unsuccessfully in contrast to niche areas of service where they would have been more successful. The production-distribution system in India until the economic liberalization of the 1990s sub-optimized the need-want fulfillment. Unfortunately, even after the economic liberalization, however, the liberalized production-distribution system continues as an imbalanced need-want system at the bottom of the social pyramid while a new desire-aspiration driver at the top of the social pyramid has emerged, leaving also a huge uncared for middle portion in the social pyramid. The Indian economy, even before it could cross the trajectory of need-want fulfillment has begun to try leaping on to a more challenging, and even diversionary, trajectory of desire-aspirations pursuit.

Desires and aspirations

Desire is a higher form of want which is accompanied by longing and craving. Influences of social esteem distinguish desires from wants. Aspiration is an even stronger form of desire, tinged by ambition, a potential sense of achievement, and a strong feeling of ego fulfillment. As opposed to needs and wants which are somewhat personalized and stand-alone, desires and aspirations are comparative and are sparked by the cognitive window that an individual possesses. In the Indian economic policy milieu that struggled to cope with “need-want” basics, economic liberalization and globalization brought in “desire-aspiration” as new drivers of economic growth. Indian markets are now home to the top brands of the world in almost all consumer-touching areas such as watches, perfumes, apparel, automobiles, writing instruments, jewels, electronics, home interior products, international travels and scores of other luxury items and services. Aspirations assume an even a larger canvas of social and economic behavior. In contrast to needs, wants, and even desires which are all, by and large, product and service specific, aspirations tend to be life-centric. For example, ambitious young executives no longer desire just a flashy car or a smart phone but instead crave for a total millionaire lifestyle. There is overtly nothing wrong in having aspirations of good to great life but when the socio-economic price of luxury-spend shoots through the roof and contrasts garishly with the stark reality of millions not having two square meals a day, one would wonder if desires and aspirations have arrived too early into the Indian psyche to be of any benefit for orderly economic development.

The issue with the creation of islands of luxury living and proliferation of luxury brands in an inequity stricken emerging economy is that it distorts deployment and use of scarce resources. This inequity gets enhanced when the luxury brands are import dependent, and even more when they are imported as completely built units. According to estimates, a typical luxury product could have an inbuilt premium of 100 to 500 percent, compared to a more functional product, in each category. For example, a luxury car would have almost the same level of component fitment and processing activity as a normal sedan car would have. Even with some allowance for premium accessories and trim for a luxury car, a luxury car requires almost the same employment hours but consumes two to five times higher consumer dollars. From an economic point of view, each dollar spent by the consumer, and invested by the producer, on luxury and super luxury products creates less employment than normal consumer dollar. The possibility of employment dollars dwindles even lower when the product is imported completely as a fully finished product. In a globalized economy, barriers to trade are, of course, an anathema to neo-economists. Yet, one cannot ignore the compulsions on resource strapped developing economies to ensure that each investment Rupee or consumption Rupee is spent for the maximum possible economic benefit.

Archaic socialism, or orderly capitalism?

The inability of the socialist economies to reach full potential in the second half of the 20th century is attributable to State controls which stifled free enterprise. India was a classic example. Surprisingly, State capitalism practiced by China gave astounding results. The 21st century, however, ushered in significant changes in the world economic order, especially over the last five years. Free market economies with unbridled financial systems posed systemic risks and caused global economic meltdown. Welfare economics funded by public and global debt without productivity driven economic growth has caused in part the Euro Zone crisis. Given that State capitalism has been uniquely and inimitably only a phenomenon of China, and in addition is antithetical to democratic cultures, there do not seem to be many choices of alternate economic paradigms that can be followed by emerging economies such as India. Rather than despair, it would be appropriate for the Indian polity to leverage the historical socialist roots fused with contemporary free market enterprise to generate a new model of orderly capitalism. The need for such orderly capitalism is dictated by the continuing inequities juxtaposed with the economic benefits of free market enterprise.

According to an analytical study by the National Council for Applied Economic Research (NCAER) and Centre for Macro Consumer Research (CMCR) just about 1 percent of India’s households have an annual income of Rs 1.25 million (USD 25,000). This is far lower than the income threshold of top 1 percent in the US of USD 500,000 to 700,000. The US figure is 20 times that of the Indian threshold, and is 10 times more even after adjusting for the purchasing power parity. On the other hand, the minimum wage guaranteed by the Central Government under the National Rural Employment Guarantee Act (NREGA) is just Rs 100 (USD 2) per day, guaranteed for only 100 days in a year. Considering the millions of indigent households, the inequities between the USD 400 annual income at the bottom end and the USD 125,000 annual income minimum threshold for the top 1 percent households are strikingly disheartening. Do the rural households need more Xylos and Safaris or more tractors and bore wells, and do the urban households need more Audis, BMWs and Mercedes Benz’s or more buses and monorails are questions difficult to answer non-emotionally. If progress is pursued without rational economic allocations there could be more progress surely but with more inequities. On the other hand, if free market enterprise is pursued with caveats of inequity reduction, potentially the benefits could be synergistic.

Optimized DAWNs: A new sunrise for egalitarian economics

The development of human race has for centuries been predicated upon creation, discovery, development and utilization of an ever increasing array of products and services, based on ever expanding frontiers of research in science and technology. This is an inexorable trend, which requires people, money and business processes to be available on an increasing level. A developed society has all of an emerging nation’s wants and desires fulfilled as basic needs. The more the wants and desires in an emerging nation the more would be the development compulsions as well as development triggers. Yet, resource generation and distribution have to be at adequate levels to support continuous growth. India is fortunate in this context. India would be adding 10 million of educated manpower each year over the foreseeable future. Many of the infrastructure projects, despite the current delays, would be energized over the next few years. High speed trains and super highways are likely to be funded well by infrastructure bonds. The oil and gas sector is likely to see induction of more modern exploration and drilling practices with foreign collaboration. With the power of talent, the torque of transport, the spring of oil and gas, and the energy of electricity, India could hope for sustainable growth. To boost infrastructure development, PSUs are allowed to issue infrastructure bonds of Rs 30,000 crore in 2011-12.

As India starts benefitting from this vast resource pool, India must also start planning for universal fulfillment of basic needs of healthcare, housing, food, education and sanitation. Planning and resource allocation indigenization of luxury to bring desires to the level of wants. Relative priorities must not be lost sight off. A spend of Rs 2 crore on a chauffeur driven imported luxury car, for example, is equivalent to an investment on 6 buses which can transport 300 people daily. The more the level of sunk investments with lower economic productivity the more cash strapped the economy and the society would be in the pursuit of the needs, wants, desires and aspirations, which are surely required to trigger and sustain an economic boom. However, by recognizing that less could actually be more (as even the luxury car makers such as Audi and BMW seem to have discovered!) and resolving once again that India should be in the forefront of indigenous manufacture of all classes of goods, policy planners and industrialists of India can usher in a new economic model for India. An optimized DAWN model which seeks to provide the vast Indian population with needs and wants at superior levels but desires and wants at basic levels, would position India on a sustainable path of high economic growth with social equity. On the occasion of the 63rd Republic Day of India, this great nation with its fascinating social fabric could have no better republican resolution than this!

Posted by Dr CB Rao on January 26, 2012

Market, Innovation, Technology and Enterprise (MITE): Corporate Longevity for Indian Enterprise

Wall Street Journal has published an interesting article on January 7, 2012 by Spencer E Ante on corporate longevity. This is based on a study of more than six million firms by management professors Charles I. Stubbart and Michael B. Knight who conclude that, In fact, only a tiny fraction of the huge stock of companies in America reach the age of 40. "Despite their size, their vast financial and human resources, average large firms do not 'live' as long as ordinary Americans," the authors concluded. Ante makes the case that the classic strategies of product focus and manufacturing scale offer little insulation against corporate mortality if they are not accompanied by integration of emerging technologies and businesses. Ante argues that corporate longevity would seem to be at stake as organizations grow large and become bureaucratic. Reviewing the histories of several companies, Ante proposes that a willingness to forsake seemingly successful products with newer emergent technologies, diversifying into new technologies and businesses, and ensuring innovation through organic effort or niche mergers and acquisitions offer the right recipe for corporate longevity.

Even more sobering is the thought that with the increasing pace of technological change even 40 years could be a long period unless firms are innovative and agile. In particular, it appears that pioneers or innovators themselves could be at risk of technological change. Eastman Kodak is a striking example of a company that pioneered photography failing to keep pace with technological transformations in core photography as well as in social networking through photos. In contrast, IBM is an equally striking example of a company that pioneered personal computers selling off the business yet succeeding to grow beyond 100 years by embracing emerging products and businesses. HP pursued scale in its core business of personal computers with the acquisition of Compaq but found that scale in hardware needed to be matched by skills in software and timeliness. Apple, in contrast, has been ever eager to let its new innovative products cannibalize the established products, which were equally innovative at the time of their introduction, and ride the waves of growth with waves of product innovation.

Another aspect that has been discussed in the article relates to mergers and acquisitions as a tool to grow. The acquisition of You Tube and Android, and more lately that of Motorola's mobile phone business are cited as powerful examples of companies acquiring new skills and capabilities to continue to grow. This strategy needs to be differentiated from certain other types of mergers, especially in the healthcare sector, which merely aimed at achieving scale, augmenting pipelines or saving costs. While acquisitions that are prompted by acquisition of emerging technologies and businesses do mean that the start-up companies that have vibrant and innovative technologies have actually low longevity, their role in enhancing longevity of the major acquiring companies cannot be overemphasized.

The Indian context

The Indian context has been dramatically different from what obtains in a free market economy in that easy exit, closure or liquidation of businesses and legal entities has never been an easy option. In fact, prior to economic liberalization such options did not even exist. Added to that, the fact that almost all private entities in India are promoter-driven with a lot of emotional attachment and family succession makes economics of growth secondary to sentiments of survival. As a result, despite lack of product renewal or financial strength, Indian entities tend to stay on in a gamely fashion. As a corollary, despite the growth opportunities that ownership changes and mergers could bring about, Indian entities are highly reluctant to consider such options.

The economic liberalization has, no doubt, brought in a shift in mindset that recognized the relevance of industrial and business restructuring to phase out non-sustainable activities and integrate developmental strengths externally. In a sharp shift, Indian companies began to exercise such growth and longevity options in the global arena. A few examples that illustrate this trend are: Tata Steel (Corus), Tata Motors (Daewoo, JLR), Tata Tea (Tetley), Tata Chemicals (British Salt), Fortis Healthcare (Quality Healthcare), Mahindra & Mahindra (Ssangyong), Bharti Airtel (Zain ), and others. Similarly, many global companies have aimed at Indian companies to support their longevity needs. However, similar activity between companies in India has been much less prominent.

Longevity drivers

In the Indian context, the drivers of longevity are still not economic. The entry barriers that characterize the Indian markets have ensured longevity in some cases despite repeated threats of new entry. Manufacture of commercial vehicles is a classic example of the country-specific requirement in India. The need for service and spare parts infrastructure in every nook and corner of the vast country has enabled the established truck and bus manufacturers, Ashok Leyland and Tata Motors, erect unassailable entry barriers. In some other cases, regulatory policies have enabled longevity at the cost of economics. All sectors which limited or prohibited foreign investments such as media, aviation, benefitted from an insulation that by default also enabled longevity.

There have, however, been firms with customer and society facing characteristics, and also with technological and operational robustness, that consistently grew, and in the process achieved longevity. Nirma, a small scale maker of soaps and detergents which challenged MNC hegemony in soaps and detergents, and became a multi-million dollar enterprise is a classic example. Several foreign and Indian firms, on the other hand, also have seen unprecedented longevity in India by focusing on the expanding needs of a growing population. Hindustan Unilever is a striking example of this facet. This list includes firms like ITC, which recently completed 100 years in India by transforming itself from a tobacco and cigarette making company to a diversified giant in consumer, industrial and hospitality domains.

Longevity examples

As India liberalizes further and as global markets face greater turmoil, Indian entities can no longer look towards regulatory, market, and other India-unique enablers to achieve longevity by default. Instead, companies should focus on strategic and structural factors that enable longevity in the entity form to the maximum extent, failing which at least the going businesses. To achieve that, however, principles have to be developed differently for different companies in different types of businesses. Focusing on six of the growth industries in India, this blog post attempts to synthesize four critical factors that would determine corporate longevity in a model called MITE.

Heavy industrial corporations

India has, even from the pre-independence days, focused on the development of heavy industries. These represent a very wide spectrum; from “declined but supported by the government” entities such as Jessop, Garden Reach and Air India to growing and profitable corporations such as BHEL and ONGC, and several others. The determinants of longevity for such companies also vary significantly; from massive restructuring of unprofitable companies to mammoth investments in new technologies and additional capacities for growth. The longevity of the companies is linked to growth in infrastructure and industry and the influx of competition from other major emerging countries such as China. Given the massive infrastructure shortfall in India, heavy industry could be a growth industry but the challenge lies in the governments and companies securing finance for infrastructure and heavy industry.

Consumer corporations

Consumer oriented corporations, mostly as subsidiaries or franchised brands of multinational corporations, have been in existence from the pre-independence days but have faced sub-optimal growth due to pre-liberalization government policies that controlled entry licenses and production capacities. Despite this, several Indian companies such as Nirma and CavinKare could establish and grow themselves into multi-million corporations from humble beginnings. Today, a level playing field exists that allows Indian and MNC subsidiaries to benefit from the rapid growth of the Indian economy, and the middle class and affluent class social segments. Corporate longevity should not be a question mark for the consumer companies but competitiveness would surely determine the differential rates of survival and growth of such enterprises.

Information technology corporations

The Indian software companies have been in the forefront of India’s globalization from the 1990s in particular. The vast Indian talent pool has enabled the Indian Information Technology (IT) companies successfully conceptualize a global delivery model based on a combination of offshore and onshore software services. The model further extended to IT enabled services (ITES) such as Business Process Outsourcing (BPO). The successes of the IT and ITES companies has prompted global giants such as IBM, Accenture, KPMG, Cap Gemini, Ernst & Young and Deloitte to set up and expand IT, ITES and other related knowledge service bases in India, and thus protect and grow their global service businesses. This field, again, is an interesting case of level playing field of competition among entities of diverse national and ownership patterns. Given the geo-political realities of retaining jobs in the Western and Emerging worlds Indian companies in these domains are now challenged to seek a different globalization model to continue to grow. Equally challenging has been the inability of Indian corporations to turn out branded products and businesses.

Pharmaceutical corporations

Like the IT industry, the pharmaceutical industry has been a great intellectual asset, and a competitive sweet-spot of India. India has been the home to the largest number of bulk drug and formulations facilities approved by the US FDA, UK MHRA and other international regulatory agencies. The global generics industry is verily dominated by the Indian bulk drug and formulation products. While the growth of the industry has so far been excellent, and any shakiness caused by the harmonization of intellectual property regime was overcome with the double digit growth of the domestic pharmaceutical market, the prognosis from a corporate longevity point remains challenging. Firstly, the Indian pharmaceutical industry is highly fragmented with scores of large scale players, hundreds of medium scale players and thousands of small scale companies. Secondly, the space that the Indian industry operates in is the generics space which is not only a tail end play but also has a declining pipeline of generic products. Equally challenging has been the inability of the select Indian pharmaceutical firms that took to drug discovery to come up with any new chemical or molecular entities that have gone through all the phases of clinical trials and international regulatory approvals for global commercialization.

Automobile corporations

The Indian automobile industry is a fascinating example of stupendous growth from ‘rags to riches’. From around 40,000 vehicles, of extremely obsolete designs, in the 1970s to over 4,000,000 vehicles, of contemporary designs, in 2011 (100 fold increase in just 40 years), the industry has achieved an amazing rate of growth. The growth has been equally amazing in terms of the variety and technology of vehicles, covering two-wheelers and four-wheelers as well as three-wheelers, tractors and construction equipment. Amongst the various growth industries, however, the automobile industry has been the most import dependent. Yet, the saga of Tata Motors and Mahindra & Mahindra in multiple product lines, and that of Ashok Leyland in truck and bus segments illustrates that Indian technologies could also achieve global level innovation and competitiveness. In particular, the design and manufacture of Nano small car and turnaround of Jaguar-Land Rover by Tata Motors is indicative of the competitive capability and the growth potential for Indian automobile firms. The challenge, however, lies in the ability to innovate in premium segments and in designing cars that suit Indian road and driving conditions. The limited road infrastructure that could constrain the growth of the Indian automobile industry is also another challenge in the context of its low export competitiveness.

Electronics corporations

If the Indian IT, automobile and pharmaceutical sectors have been the high points of growth, the electronics industry has been a relative laggard. India’s deficiency in electronics development and manufacture is in stark contrast to the global dominance that China and Taiwan as well as South Korea (in a more pioneering fashion) have achieved in the domain. That said, the recent progress of India in the manufacture of telecommunication equipment, especially mobile phones, tablet computers, television sets and certain other electronics gear is reflective of the capability of the Indian electronics industry to develop new competencies and grow. Like automobile industry, the Indian electronics industry needs strong market-linked collaborative strengths to attract new product and manufacturing opportunities to the country. Accuracy of manufacture, finish of the products and low manufacturing cost seem to be the primary factors for success of the electronics industry in China, independent of the availability of local market. Apple products constitute a good example of the global conquest through Chinese manufacture.

MITE as a longevity model

The above discussion of the six growth industries of India helps formulation of a corporate longevity model. For the Indian enterprises, the key to longevity lies in understanding the importance of the four key factors of market, innovation, technology and enterprise (or, entrepreneurship). Firstly, India itself offers a huge market, but the enterprises must be savvy to identify the markets and develop them aggressively with appropriate products and services. In addition, the international markets are all available for the Indian companies to be won on the basis of competitiveness. All the six industries discussed above teach us that markets are eager to be served by the Indian companies. Secondly, the concept of level playing field has come to stay. Companies need to compete on factor advantages rather than on policy advantages. Yet, access to global factor advantages is also becoming possible to all global corporations. This implies that only those firms that are consistently innovative can be more competitive and enjoy the benefits of longevity. Startup innovation provides the toehold but continuous innovation alone can provide sustained growth. Thirdly, technology would be the core of competitive advantage. Those companies which deploy technology on an end-to-end basis, across the total value chain, would be more competitive than firms which deploy technology only in some areas, be it manufacturing or R&D. Fourthly, every company should remember its basic enterprising spirit and its entrepreneurial roots. Firms as they become large must preserve and foster entrepreneurial spirit as an organizational DNA. As the WSJ article observes, the board rooms of high growth and high longevity corporations tend to be as entrepreneurial as those of successful startup companies.
On a holistic basis, all the four factors are equally important but entrepreneurial spirit probably provides the fundamental corporate genetic impact to stay hungry and keep growing. As the companies become larger nationally and internationally, growth is often accompanied by bureaucracy, with multi-layering and multi-reporting. Firms fail to customize themselves to diverse markets and their needs, and instead attempt to find solutions in globally standardized products and services as well as business processes. The experience of the six growth industries suggests that an ability to customize and innovate across markets has helped certain industries such as information technology and pharmaceutical industries to take part in global growth while certain globalized industries such as automobile industry could achieve tremendous local success in India by customizing their products to local conditions. The strategies of even luxury car makers such as Range Rover, BMW and Audi to offer crossover vehicles such as Evoque, X1 and Q3 respectively to India indicates the recognition of the need for local customization, covering both urban and rural markets. Indian enterprises committed to global longevity must first internationalize their organizations to understand the markets, innovate on their products for customization and build the technological base in the value chain to manage product variety with productivity. The MITE model of corporate longevity provides the might to Indian enterprises to seek and achieve perpetual growth.

Posted by Dr CB Rao on January 15, 2012

De-globalization and Re-localization: Towards One Economic World

The growth of all developed countries had been in a large measure due to such countries driving their industrial and economic growth based on not only strong internal consumption but also aggressive overseas exports. The exports from developed countries typically comprised technologies, capital goods, raw materials, components and finished goods to other countries. In recent years, the developed economies have started to support their faltering economies by outsourcing their production to low cost emerging economies while the emerging economies started adopting the developed countries' model of export led growth. In the meanwhile, the global financial volatility of the last several years continues unabated. In fact, it is spiked up by the growing public debt of several developed countries and collapse of domestic demand-supply bases in such countries coupled with unpredictability of exchange rate regimes. This has, in turn, cast a serious shadow on the relevance of export led growth models that are sought to be pursued by the emerging economies.

There are, of course, significant differences in the characteristics of the developed and developing economies. The developed countries are characterized by flagging demand and low job creation, especially in the manufacturing sector, in a demographic shift towards the aged and an economic mix dominated by services. The developing countries are characterized by surging demand and high job creation, boosted by a demographic shift towards the young but constrained, however, by poor quality of infrastructure and huge urban-rural and rich-poor divides. The export led and foreign investment led models of growth of emerging markets are threatened by the economic uncertainties faced by the developed economies. This has depressed demand and increased the global financial volatility which has, in turn, affected investment flows. There, however, seems to be little appreciation by policy makers and industry leaders of the emerging markets on the risks to their growth models. The emerging markets seem to be chasing the overseas chimera while ignoring the domestic growth needs. There is a need for both developed and developed countries to re-prioritize the globalization and localization models.

Viability motive in developed countries

As the Eurozone crisis demonstrates, developed countries are committed to sustaining current living standards affected by lower incomes and lower savings with lower costs of products and services. Their emphasis is on searching globally for the least cost sources even while continuing the approaches to develop new products and new markets. While product development has no doubt accelerated in the last two decades in the developed economies the acceleration has not been a determinant of greater gross incomes. The impact of enhanced innovation is reduced by the shorter product life cycle. New products typically substitute the previous generation products rather than co-exist. With the consumption driven society facing incomes crisis, the strategic mindset of the developed markets is focused on sustaining viability through cost competitiveness rather than through value enhancement.

The strategic mindset of viability at any cost (actually at the lowest cost possible!) reduces the innovation levels due to reduced investments on research and asset modernization. At times, the unceasing quest for the lowest cost also impacts quality as demonstrated by the problems faced by certain product categories due to imports from certain countries. The financial orientation is compounded by an analyst and investor mindset which relentlessly focuses on quarterly results, especially corporate profitability and shareholder returns. This emphasis, no doubt, trains the managements to conserve resources and minimize waste but it also makes them risk, investment and innovation averse while driving them to globalize to outsource and reduce costs. It requires significant leadership strength to fight against the dominant trends and reinvest for growth. It is a moot point if the state of frozen growth faced by the developed countries needs to be thawed by government incentives, industry actions or firm level competitive moves. In all probability all are required in unison.

Growth motive in developing economies

The emerging markets, especially China and India, have been notching up high rates of economic growth for the last several years. In fact, it is said that the unrelenting infrastructure development and competitive manufacture have made China the most important partner for several developed economies. India has also been treading a similar path, albeit with a lag. However, global adversities and local inflation are slowing down growth in emerging economies. The impact has been two fold; reduced investments from developed countries serve to reduce new project formations in emerging markets while increased inflation in emerging economies affects the cost-competitiveness of products and services. There is, however, no predictable outcome of the changing equations given the unpredictable movement in exchange rates. As corporations in emerging markets are buffeted by these several adverse trends, export-led growth becomes a somewhat shaky model.

The emerging countries seek to bolster their competitive position in the changing scenario by opening up the economies even more. India, which has gained significantly from the opening up of the economy to foreign investments, has been facing some criticism for not opening up the economy even further to make India an even more favored destination for foreign investments. There is, however, equally a pushback from certain quarters based on concerns arising out of land use, import-led project creation, squeeze of small and micro enterprises, exploitation of indigent farmers, and so on. In the absence of an objective discussion, the subject of further economic reforms is tending to be more polemical than technical. Some examples such as the current foreign direct investment policy for pharmaceuticals, sale of Cairn oil business or new policy on foreign direct investments in multi-brand and single-brand retail are indicative of the controversies relating to quick policy fixes devised from time to time to keep the emerging economies growing at a fast clip.

Market-led or factor-led?

Emerging markets have to rethink their development and growth strategies. For India, in particular, although opening up of the economy brought in excellent benefits of outsourcing in the past, a similar strategy may not provide similar results in future, at least on the same scale. If the first phase of reforms brought to the fore the relevance of India’s factor inputs (technical and managerial talent; human and corporate side of free enterprise), the second phase could provide a much larger menu of options based on a switch to market based growth. This is because factor-led growth focuses on making global products cheaper using India’s low cost factor inputs and conversion economics. Many times this could be only for captive consumption through directed development. Depending on the standing of the sponsors, the factor suppliers or the conversion specialists would prosper. Even then, most production in the factor-led model enables viability to global developed markets rather than to the domestic markets.

Market-led growth on the other hand focuses on the huge domestic demand of the emerging economies that remains untapped. It would provide additional product scope and manufacturing scale to the base levels of the factor-led model. The domestic market would have additional products at appropriate value points, often developed through creative science and frugal engineering. The additional scale and scope thus obtained would also have collateral positive impact on the basic global products of the sponsor. The policy regime of India (whether of 100% EOUs or SEZs), however, provided incentives and tax breaks only to export production and sale. Any domestic sale by such companies would draw equalization of duties and taxes, hiking up the pricing of products for the domestic tariff area. In one sense, penalizing the domestic market with higher prices is inequitable, and deserves correction in the current phase of reforms.

De-globalization, re-localization

At the core of the new paradigm for balanced growth of the Indian economy must be a balanced emphasis on globalization and localization on a 50:50 ratio, as a general guidance. This means that every enterprise must seek to cater to global markets and local markets equally. The advantages of this mindset shift for the Indian enterprises and economy would be enormous. Those firms that are steeped in antiquated products and sheltered under low value points with 100% local market oriented production will start understanding and absorbing global technologies, in terms of products, processes and quality. Apart from achieving better revenue status through the newfound export orientation, such enterprises would also be integrating the new technologies for the local market, achieving better competitiveness in the local markets. The economy would obviously benefit through additional export revenues from the hitherto wholly domestic oriented units and the expansion of the local market with better products by such firms.

The 100% export oriented units would conversely dedicate 50% of their capacity for serving the local market. This would enable such firms access the vast and growing Indian market and achieve business stability, even if accompanied by a pricing compromise required for the domestic market. Such a move to allocate 50% of the capacity for the domestic market would benefit the enterprises in terms of a capability to develop and manufacturing products that suit the challenging Indian market. It would also enable the enterprises be better equipped to cater to other emerging markets. The economy would significantly benefit from the availability of global product range in the country without resort to costly imports. On an overall basis the 50-50 approach would also address the concerns of the developed world that outsourcing to emerging markets is all about low cost production; they would appreciate that the new approach secures market access too.

As a corollary to the 50:50 approach, emerging countries should also insist on at least 50% localization as a target, whatever be the product. This would enable the development of the industry even in high technology segments. For example, import of luxury cars on a completely built-up (CBU) basis would be modified to partial import and local assembly based on semi-knocked down unit (SKU) basis. While such approaches were there in the past, notably until the 1990s, they did not result in any significant gain as the demand did not exist for such high end products in India. The demand profile in the liberalized India is significantly different, and has its place for high end products. This would provide the requisite base for local component and manufacturing support for high end products too.

Policy regime, paradigm shift

The more balanced globalization-localization paradigm advocated herein offers multiple benefits as outlined. It brings economic development on to a more balanced platform globally, and provides stability to all economies. The emerging markets, however, need to put in place certain policy prescriptions to usher in this change on a sustainable basis. For example, the 100% EOU and SEZ policies may have to be modified to provide for allocation of 50% of capacity for the domestic markets as a target. Correspondingly, such production should not also be levied additional duties in the event of sale to domestic tariff areas. In order to ensure greater transparency and stability, a new 50-50 export-local policy regime should be brought in. The policy would help the Indian industry far more than individual sector reforms could help. There is also no need to be concerned that 100% EOUs and SEZs would have greater tariff advantage as a level playing field would be created for the hitherto wholly domestic units too.

Along with the intellectual property protection regime that is now in place in India, the new 50-50 policy regime should induce innovator firms in all industries to locate the production of their patented products also in India. This would enable the Indian public have access to patented products, especially in the healthcare sector and obviate the need for measures such as compulsory licensing. The innovator firms as well as the global consumers would have the benefit of lower cost development and production of generic as well as innovator products in India. While at first look the suggested 50-50 policy prescription may look threatening both to overseas firms and domestic enterprises, the principles of equality, technology and market access and level playing field that support the new policy prescription would provide tangible and sustainable benefits.

One economic world

Eventually, economic development would seek a global equilibrium. The developed world has seen limits to growth and profligacy. The emerging world which is tasting the first fruits of liberalization and prosperity would soon discover its limits to growth due to gradual erosion of competitive advantage. An ability to cater to domestic as well as overseas markets equally, and a capability to contribute at least 50% of local value addition would enable the Indian enterprise stay stable and competitive. The approach would enable the foreign enterprises be equal corporate citizens in the local markets providing global products competitively to local markets while benefiting from the talent and cost arbitrage that India offers. The de-globalization cum re-localization paradigm would lead to an equitable One Economic World, providing a rightful competitive position to emerging countries such as India.

Posted by Dr CB Rao on September 27, 2011

Economic Behavior of Nations and Societies: A Strategic Role for Governments

The World has breathed a major sigh of relief that the Greece led Eurozone crisis is averted, yet another time, as a result of the high-level summit of Europe’s leaders at Brussels on October 27, 2011. The world’s most powerful leaders, ministers, investors and bankers had to undertake weeks of intense negotiations to arrive at the latest settlement. The size of the bailout fund, the European Financial Stability Facility (EFSF) has been increased from 440 million Euros to 1 trillion Euros, with a leverage of four to five times of its corpus. The lenders or the bondholders to Greece have agreed for a loss of 50 percent while converting the existing bonds into new loans. Greece itself would be handed over a new bailout fund. The European banks would be recapitalized to an extent of an additional 1 billion Euros while the countries in potential default like Greece and Italy have agreed to implement reforms. Stock markets, the world over, have greeted the Eurozone outcome with the ramping up of all the indices. That said, there is concern if the restructuring and rehabilitation would have a lasting impact or whether there would be a quick return to the specter of public debt crisis again.

At the heart of the crisis lie excessive and profligate public and private spending on the back of easy and unchecked loans, and in some cases asset bubbles supported by artificially high prices. The solution now proposed of stringent austerity measures including layoff of workers, reduction of salaries, pensions and benefits and cutbacks in public and private investments not only cause social strife but also run counter to demand stimulation that is required for economic revival. The way all the European leaders had to cooperate to resolve the crisis in just one country of the 17 country Eurozone points to the highly coupled nature of global economy and the threat of contagion effects of collapse of any one economy on the entire global economy. The Eurozone crisis, which followed the crisis in the US triggered by the lowering of sovereign rating, clearly demonstrates the fragile nature of global economy. It is of discomfort that the economic crises are being sought to be tackled by financial means rather than by sustainable structural reforms on the back of industrial competitiveness, and demand-supply balance. The root cause which is the economic behavior of nations and societies needs to be addressed.

Economic behavior

Like individuals, nations also display an economic behavior. A nation whose society, or sections of the society, prematurely considers that the peak of affluence has been achieved would give a goby to the core concepts of productivity and innovation as well as equity and equality that drive continuous development. A nation which tries to achieve growth through top down investments rather than grassroots development would face lopsided development. The competitive behavior of emerging nations, and the states or provinces within nations, unfortunately has been ignoring such requirements. Governments have sought the easy way to attract development and foster industrialization by offering fiscal sops or incentives and subsidies rather than by creating durable high quality infrastructure. This trend has been more so in respect of India where State governments typically vie with each other to create favored state for individual corporations.

Societies also tend to chase affluence sans productivity. As an economy begins to transform itself skews in demand and supply of talent take place, with enhanced job opportunities chasing limited skill sets. This, in turn, drives up wage structures in certain classes of employment while leaving a broad base of jobs relatively untouched. This, in turn, leads to a spurt in the consumption of luxury goods and premium products. For each luxury car imported into India, for example, seven to ten sedan cars based on locally made components can be produced, leading to much greater employment generation and more equitable wealth generation. In such skewed societies imports tend to be on unproductive lifestyle products rather than essential technological tools and equipments. Gross capital formation thus tends to be channeled into activities with poor capital-output ratios, sub-optimizing overall growth potential and maximizing inequities. Emerging nations need to strengthen their institutional mechanisms to ensure that economic behavior is appropriately shaped. Some of these are discussed below.

Islands in deserts?

World economy is certainly in the throes of major change. While everyone expects the centre of gravity to shift to emerging markets especially India and China, the transition is beset with substantial volatility and fluidity. Factors of market strength and supply competitiveness are dramatically influencing how the established and new economies shape themselves. Emerging markets cannot be smug under the assumption that they would be driving the future economic waves simply by demographic advantage or through investment flows. Nor can the emerging markets accept the premise any more that the Western style reforms and investment banking solutions are the panacea of globalization. Excessive public investments or private consumption are also not a long term solution for economic sustainability. By all accounts, the increasing speed with which global funds take flight is panning out to be inversely proportional to the decreasing pace with which the nations are able to grow their real economies.

Emerging markets have enormous scope for development but need also macroeconomic stability to sustain growth. The paradigm of growth in emerging countries is dependent substantially on such countries feeding their products and services to developed markets on one hand and expanding their respective domestic markets through new technologies, often based on imports from developed markets. Global economic coupling is, therefore, a fact of the current global order. A shrinking developed world, in economic terms, would eventually have a depressing influence on the growth of emerging markets as well. The concepts of global cooperation as evidenced by Eurozone and G 20 efforts are appropriate. That said, the emerging markets as well as the developed markets need to learn from the experiences of the last five years to get global growth back on track, with equity, stability and rapidity.

Central financial institutions

If there is one universal lesson that has emerged from the global liquidity crisis and its aftermath it is that central institutions such as the Federal Reserve in the US, Bank of England in UK, European Central Bank, Bank of Japan and Reserve Bank of India play a major role in stabilizing truant economies. Conversely, weak central institutions or central institutions constrained by bureaucratic and political influences would be incapable of protecting and growing the respective national economies. On the whole, it appears that except in respect of India, various central institutions, especially of developed economies, have been less than proactive and prudential in the oversight. The velocity of fund flow in the developed world is so high that any oversight or regulation was seen to be counter to the free market culture. The last few years have been teaching us through successive crises that proactive regulation by the central financial institutions would be better than retroactive intervention after the economies are battered by institutional collapse. The latest US rating resolution and Eurozone resolution point to the continued influence of political and governmental institutions on the empowerment and functioning of the central financial institutions.

The linkage between the policies of the central financial institutions and the response of the stock markets is another important consideration. While central institutions cannot, and should not, take policy decisions with an eye on the stock markets, undue unpredictability and suspense in key decisions seem to lead to stock market speculation and volatility. Given that there could be shades of right and wrong in any policy decision and given also that any policy decision has a strategic objective it would probably make better sense for the central institutions to lay down a rolling twelve month policy regime which also indicates potential, not necessarily mandatory, policy moves that could be taken should the economy behave in certain manners. India has benefitted in the past by reducing the mystique (in terms of incentives, subsidies, duties and taxes) from the annual budgeting process. Probably, the same approach would be appropriate for policy pronouncements from the central financial institutions. The latest forward guidance from the Reserve Bank of India on future rate revisions, for example, has had a positive effort on the Indian stock markets.

Too big to fail, too small to succeed

One of the striking takeaways of the global liquidity crisis is that the bigger the institution the greater is the adverse impact of its failure. This has been demonstrated in as diverse institutions as financial services industry (Bear Stearns and Lehman Brothers) and automobile sector (General Motors). The developed markets, despite the existence of strong anti-trust regulations, have enabled scale-intensive mergers and acquisitions. At the same time, studies of such mergers and acquisitions have also established that several of these have eroded rather than added value, even ignoring the undesirable trauma of factory closures and job eliminations that accompany such mega mergers and acquisitions. Emerging nations in their quest for global scale of their industries must be conscious of the need to insist on appropriate logic of such transactions. Fundamentally, the emphasis needs to be on achieving efficiency independent of scale as a first preference. Institutions such as National Competition Commission must play a positive and proactive role in enabling micro-economical growth of industries in alignment with macro-economic fundamentals. The concept of financially bailing out those who are too big to fail cannot be allowed to distort the fragile economic systems of the emerging nations.

The need to balance the big with the small is the essence of prudent macro-industrial management. While growth is an inevitable impulse of all companies, growth is not the only way to become profitable. Niche in products and services enables small and medium enterprises to contribute to the national economy. Central, shared services of technology and marketing, usually sponsored by the governments could help small and medium enterprises retain the agility, efficiency and nimbleness of their small and medium enterprises with the scope and scale of shared services. Some of the established principles of Indian economic management such as big corporations and government procurement organizations supporting the small and micro enterprises are relevant but have not delivered so far due to technological and marketing insufficiencies. Probably, a holding corporation to support micro enterprises of an industrial value chain could provide the needed resources for product development and marketing while enabling the individual enterprises focus only on cost-effective manufacturing.

Banking on banks

Banking competitiveness is as important as industrial competitiveness is to economic stability and growth. India is fortunate that the banking sector does not deal in exotic products as the institutions in developed countries. Even singular products such as derivatives had affected several companies in India in 2008 and 2009. This had reflected poorly on the internal audit and compliance mechanisms of various banks as well as the timeliness of oversight by the Reserve bank of India. This has been reflected in a different manner by the collapse of microfinance institutions in India in wake of the exorbitant interest rates and exploitative arbitrage of concessional funding extended to such institutions and self help groups. Delays in the implementation of prudential capitalization norms of Basel III may render the Indian banks weak in terms of capital adequacy (the first policy statement by the Reserve Bank of India on Basel III is expected only by end December 2011). India has also not taken up stress testing of its banking sector as it ought to have done in the wake of global liquidity crisis.

While the Reserve Bank of India, and the overall Indian banking system, have come out better within the global banking community for their caution and conservatism, it would be inappropriate to rest on this relative success. As the State Bank of India episode has shown Indian banks are saddled with high levels of non-performing assets. Indian banking at one time took upon itself the task of consulting with its clients to develop their businesses on the right lines but has eschewed that path. In the interests of sustaining the asset quality it would be appropriate for the Indian banks to set up on a consortium basis a consulting cum rating organization that could provide asset rating and business improvement services concerning their clients to the banks. The Indian banking system has to move beyond the limited tool kit of repo rates, statutory liquidity ratios and cash reserve ratios to fundamental economic and industrial analysis to ensure that the funds are deployed productively.

Central economic planning

Central economic planning received much criticism from the 1950s for the tilt towards socialistic and command economic model it implied. It was seen as regressive attempting to throttle how human enterprise would like to plan its development. The developments of 2008 and beyond have, however, brought out the risks of a completely unplanned economy. Whether one likes it or not, mixed economy of public and private participation is a matter of fact. Whether the governments should participate in certain capital intensive domains such as power utilities and inherently non-profit driven activities such as education and healthcare is no longer a matter of debate, at least for the emerging markets. Rather than provide huge incentives and subsidies to attract overseas and private enterprises to capital intensive projects, probably it would be better for the governments to provide them through utility rates that the society can bear. That said, it is somewhat inappropriate that the central planning commissions should focus on tax and investment allocations than strategic direction of economies.

India is going through its Eleventh Five Year Plan 2007-12. The Indian planning commission ought to be initiating the Thirteenth Five Year Planning exercise covering 2013-18. The approach to date continues to focus on central and state allocations. Instead, the Indian Planning Commission should focus on major structural transformations that could take India to a different trajectory of development. Some of the strategic game changers for India could be high speed transportation (for example, bullet trains, expressways, freight corridors), optimal energy generation mix (for example, nuclear, non-nuclear), universal social infrastructure (surely, education, healthcare, housing), and focus sunrise sectors (for example, nanotechnology, genetic engineering, semiconductors). The central planning process should focus on identifying, generating and channeling mega investments for strategic game changers for the economy.

Growth with equity

It should be the dream of every economic planner to ensure growth with equity for his or her nation and society. In a global economy, strong domestic demand and equitable spread of life style are essential for growth to be sustainable. The governments cannot abdicate the responsibility for directing growth entirely to free enterprise and private sector. A combination of policy management framework that could govern economic behavior of nations and societies comprising diffusion of growth initiatives, strong central financial institutions, optimal scaling of enterprises, banking regulation and central economic planning would provide a platform for sustainable growth with equity.

Posted by Dr CB Rao on October 30, 2011