from the mailbox: on sustained growth in the indian economy

dec 1

from business standard, forwarded by a friend. the overall picture does look good, but i am very concerned about

a) energy: i am convinced that the headlong rush for hydrocarbons is foolish and that indian negotiators are being taken to the cleaners, being johnny-come-latelies into this game. btw, there was a deal engineering by lakshmi mittal recently with some african country that had significant barter elements (like building railways using indian knowhow). anybody have an opinion on this?

b) strategic errors such as the nuke issue and the lack of a muscular foreign policy that will encourage the chinese and the americans to attempt to manipulate the indian economy. the worst-case scenario here is that they will simply ratchet up terrorism whenever things look good. a few judiciously-placed bombs and riots and the 'secular' media and NGOs will create so much noise that all ideas about the economy will go out the window.

i am also getting more and more disillusioned with this 'growth at any cost' mantra principally because that will force india to pursue the wrong, well-trodden paths followed by the west and now china: environmental degradation as the price of 'progress'. i wonder if, gulp, the 'third way' of reduced growth and reduced environmental damage is the right answer. i find the untrammelled growth of for instance bangalore and the choking traffic jams there nerve-wracking. this is no way to grow. and we're attempting to create mini-bangalores all over the place. i'm beginning to wonder if we're rushing headlong into something that will ruin the land; i believe india's greatest long-term competitive advantage is in the wonderful land and water and the people. degrading all three of them is what we're doing by following the chinese path. the chinese are facing desertification, water pollution and severe beggar-thy-children-and-grandchildren greed.


---------- Forwarded message ----------
From: G

Interesting analysis of factors underlying recent growth. But it is
infrastructure and labour laws that will hold India back (read
communist intransigence). Any anecdotal information on Indians
acquiring foreign firms to acquire ownership of their R&D
capabilities?

G

Subir Roy: How to sustain 8 per cent growth

VALUE FOR MONEY

Subir Roy / New Delhi November 30, 2005



Anecdotal memory sometimes catches the flavour best. In the late
eighties I recall engaging Raja Chellaiah in an extended discussion in
the Planning Commission on whether a 6 per cent growth rate, as spelt
out by Rajiv Gandhi, was sustainable. He seemed to think not. Where
were the resources? Today there is intense discussion over what needs
doing to make an 8 per cent growth rate sustainable.

Not only has the incremental capital output ratio gone down through
the nineties, allowing the economy to get a bigger bang for its
investment buck, currently domestic investment is forging ahead of
savings, getting reflected in an emerging current account deficit.
Very lately there has been downward pressure on the rupee. That is not
yet a cause for worry, but for how long?

The sustainability is important as China has had sustained double-
digit growth which has after cooling off efforts come down to single
digits. On the other hand, India post-1991 has seen a clear phase of
heating up (1994-97) and an extended cooling-off that ended in
2002-03. A significant aspect of the recent pickup in economic
activity has been the rise in capital investment, which has resulted
from a tremendous resurgence of confidence—the same kind of confidence
that briefly prevailed around 1994-97. Will this confidence ebb again,
as it did after 1996 or be long-lasting, as it has been in the case of
China?

The floating of the rupee and reduction in tariffs post-1991 first
severely jolted Indian industry, which somewhere in the late nineties
underwent a change of heart. It stopped clamouring for protection and
began to actively pursue the goal of becoming globally competitive.
The change in attitude and prospects is nicely captured by the Indian
machine tools sector. Since the early nineties, it was severely
affected by rising imports made possible by trade liberalisation. Then
somewhere down the line it decided to modernise itself, found a
competitive niche for itself in more complex machine tools, and, since
2001, has not looked back, buoyed by burgeoning demand from galloping
sectors like automobiles.

After automobiles, auto components, and machine tools, it now seems
the turn of textiles to carry growth and employment forward.
Considering the high weighting that textiles have in the economy, it
is likely to significantly impact overall manufacturing growth over
the next few years, thus providing one of the key building blocks for
sustainable high growth.

The combination of good corporate results over the last several
quarters and overall confidence has wrought a remarkable
transformation across India's corporate sector. While firms have been
growing rapidly domestically, they have of late begun to make
aggressive acquisitions overseas. Significantly, this is not to
acquire size but capability, most of the acquisitions being carefully
targeted to acquire technology and R&D platforms.

If to this we add the rapid outsourcing of R&D work, again across
industries, to India over the last few years then an intriguing
scenario emerges. India or Indians have the R&D capability to produce
globally cutting-edge technology but not the corporate vehicles of
sufficient size to own such technology and becoming a leader like
Samsung. But the way in which domestic growth and overseas
acquisitions are progressing, some small Indian Samsungs may not be
far away.

The difference with China is critical. Large Chinese firms have size
and acquired technology. Indian leaders now are deficient in both but
are ahead in their entrepreneurial drive, managerial skills, and their
ability to absorb technology and benefit from the maturity of Indian
free market institutions and practices. As has been said with a bit of
over- simplification, Indians are good at the soft stuff (this goes
well beyond software) and Chinese are good at the hard stuff (this
goes beyond plants and infrastructure into hard policy decisions
facilitated by one-party rule). Given all this, if Indian companies
are allowed to grow for a few more years, the way they have over the
last few, then the country may not have to look back.

What can spoil this dream or stand in its way? Growing competitiveness
is, to begin with, all about cutting costs. The two areas in which
costs need to be cut are power and money. The problems in the power
sector, as also what needs to be done to set it right, are well-known.
Related to this are the roadblocks in the way of exploiting India's
huge coal reserves. The incentive to move on the latter front is huge,
given current global oil and gas prices.

The falling cost of funds through the late nineties is widely
recognised as a key contributor to emerging Indian competitiveness. So
the need to cut the cost of money further is not so widely recognised.
Lower banking spreads resulting from higher deposit rates will restore
some of the attractiveness of financial savings for the household
sector and make available more resources for investment.

Bringing lending rates down a bit more will enable Indian banks not to
lose their best customers to overseas markets as also bolster their
bottom line. Recent reports indicate that the finance minister put a
stop to public sector banks trying to jack up lending rates to prime
customers in unison. The finance minister has to now help the banks
reduce manning levels as they make huge investments in IT so as to
reap the cost benefits of such investments. That is a tough task, but
so is sustaining 8 per cent growth.

                    sub@business-standard .