CHAPTER 1 INDIA’S BOOMING ECONOMY
‘I believe India could be the fastest growing economy in the world one day. It would be foolish for Virgin not to embrace India.’
Sir Richard Branson, chairman, Virgin Atlantic Airways
THE SCENARIO IS familiar. With the housing market surging and retail prices climbing, in April 2007 the bank sought to cool inflationary pressure by putting up interest rates for the third time in just four months. Amazingly, this is not a major European economy we are talking about, but India. The house-price surge that was ringing the alarms was at its most acute in New Delhi, and the bank raising interest rates was the Reserve Bank of India.
It is a measure of just how far India’s economy has come that even its financial problems have now moved into the same arena as those of the major developed economies. Indeed, this spate of interest-rate cuts was fuelled by fears that the Indian economy is growing so fast that it is now actually in danger of overheating.
So much foreign investment has flowed into the country in recent years that the banks are completely awash with cash. They have been in such a hurry to disperse their funds that bank loans are on the rise by a third each year – and loans on commercial property almost doubled in 2006. At the same time, the country’s factories and infrastructure are operating at their limits, and India’s own suppliers just can’t cope with rising consumer demand – resulting in intense pressure on retail prices.
Not surprisingly, India’s economic pundits are not quite so gung-ho about getting economic growth accelerating even more. Until recently, the Indian government was chasing China’s expansion rate of 10 per cent a year. Now it is even beginning to think about taking the foot off the pedal a little.
All of this is quite astonishing. Little more than fifteen years ago, India was looking like something of an economic basket case. In 1991, its foreign-exchange reserves dropped to virtually zero as the Gulf War triggered a rise in oil prices that effectively bankrupted the country. Barely three decades ago, things had been even worse. The country was overwhelmed with riots and strikes brought on by severe economic hardship, and Indira Gandhi was forced to devalue the rupee under pressure from the International Monetary Fund (IMF) – not to mention her suspension of democracy. After a series of bad harvests, the situation became so desperate that India’s poor were only kept alive by ship after ship of American grain, and it became a black joke that the country was living ‘from ship to mouth’.
The great breakthrough
It was the 1991 crisis, though, that proved to be a turning point. Faced with economic collapse, the Indian government finally decided to abandon some of the restrictions on trading that dated back to the time of the British Empire, known unaffectionately as the ‘Licence Raj’. There was something of a defeat in this, because it symbolised the final abandonment of India’s cherished ideal of swadeshi, self-reliance. It was a reluctant acknowledgement that if India was to prosper it would have to fully engage with the world. But the results of the liberalisations introduced by the Finance Minister Manmohan Singh (who became Prime Minister in 2004) have been remarkable. Between 1991 and 2004, India’s economy grew by an average of 6 per cent a year. In 2005 and 2006 growth accelerated to over 8 per cent and in 2007 it looked like it might be well over 9 per cent. Double figures – not far behind China – are on the cards for 2008.
To characterise India’s slow growth in the first four decades of independence, people sometimes talk disparagingly of the ‘Hindu rate of growth’ – which was barely 3 per cent annually. They point out how misguided Nehru was to spend vast sums of money on big capital projects like dams and factories. It’s certainly true that these grand schemes devoured a huge amount of India’s meagre financial resources with only limited gains, while agriculture received barely a fifth of government spending in Nehru’s later five-year plans – despite the fact that more than 80 per cent of India’s population depended on farming. Yet Nehru was following the wisdom of many of the best economists of the time on how to develop a socialist economy – and a similar strategy had worked for Russia. The only element that India was missing – and maybe that was crucial – was land reform, of which Nehru was unable to persuade people of the benefits.
But despite the limitations of growth in Nehru’s time, it was actually much, much faster than growth had been under the British, and it may have provided a more solid foundation for the growth that has followed than might at first seem apparent. First of all, Nehru made sure that English remained India’s common language – and it is Indians’ fluency with English that has helped them to make an impact in the international information technology (IT) and communications market that is way beyond that of China. Moreover, Nehru’s governments set up the five Indian Institutes of Technology, the IITs, which provide the top-end graduates for much of India’s booming high-tech industries. And his grand building projects gave countless people the experience of working on big engineering schemes, which is now proving invaluable.
IT India
India’s economic development has been far from conventional. The conventional pattern is for cheap, low-cost manufacturing industry to emerge and provide broad-based industrial employment for large numbers of people, encouraging urbanisation. As industrial experience grows, there is a shift towards higher value, more sophisticated products. Then, finally, high-tech and service industries begin to set the pace. This is not only what happened in the UK long ago; it was also the pattern in post-war South Korea. And it is what seems to be happening in China.
India, however, has shot straight into the third stage, with an economic boom that has relied almost entirely on high-tech and service industries. It does have a range of manufacturing industries, but they are remarkably small for a country of India’s size and prosperity.
There is no doubt that India’s success in the IT world has transformed the country. A milestone was passed in 2003 when the software sector alone earned more money than the entire cost of the country’s oil imports – the factor that had brought the country to its financial knees in 1991. This meant that when the invasion of Iraq pushed oil prices up again, India was able to ride out the difficulties almost with equanimity.
But the astonishing success of IT India, which has transformed cities such as Mumbai, Hyderabad and Bangalore, disguises some worrying problems. IT and related industries employ barely a million people, in a country with a workforce of not so far short of half a billion. So while the tiny handful of high-flying IIT graduates can make a fortune, very few new jobs are being created for the ordinary Indian.
Job insecurity
One of the remarkable things about India is just how few people have recognised, secure jobs. In 2006, India’s workforce was over 470 million. Yet just 35 million of them (barely 7 per cent) have formal jobs and pay income tax – and 21 million of those work for the government! So a country with a population of over a billion has hardly more income tax payers than the UK. All the rest – some 435 million people – work in what Indians call the ‘unorganised sector’. These are the countless millions of Indians toiling away on the family farm, running little shops and stalls, hiring their services as mechanics, working as security staff, laundrymen, gardeners, kitchen staff and so on. And all for a meagre income.
For most of these people, the chances of actually getting a job in India’s new boom economy are as scarce as rain in the dry season. Workers are rarely working in the black market through choice. Formal jobs are highly sought after. People outside India may imagine the foreign multinationals that move into India are taking advantage of labour at exploitatively cheap rates. In fact, if those jobs are formal jobs, they are coveted – because rates of pay are six to nine times higher than casual jobs, and they offer a very high degree of job security.
Indeed, some people put the blame for India’s dearth of secure jobs on the country’s restrictive employment laws, one of the elements of the Licence Raj that survived the reforms of the 1990s. Nehru introduced them with the intention of protecting workers from exploitative bosses. But the effect has been to discourage employers from taking people on the payroll because it is very difficult to take them off again. It is hard even to sack someone for persistent absenteeism, an endemic problem in India, typified by the teaching profession, which loses some 40 per cent of teaching time through teachers failing to turn up to work. Indian employers are reluctant to take on staff when expanding in case they should be lumbered with an over-large workforce if things do not go quite to plan.
PROFILE: RATAN TATA
‘We were very obsessed with ourselves in India. So I have felt for some time that we didn’t need to be that.’
This is how Ratan Tata, head of the giant Tata group of companies, explained his company’s decision to take over Anglo-Dutch steelmakers Corus and UK tea suppliers Tetley. Tata is not as rich as some Indian corporate bosses and the Tata group is not as big as some Indian multinationals. But it has been one of the leading Indian companies for a long time, and Ratan Tata, son of Tata legend J.R.D. Tata (Tata boss since 1933), is deeply respected for the remarkable way he has turned the group round.
Back in the 1990s, when J.R.D. handed over the reins of power to Ratan, Tata was a crumbling, sprawling giant, likened by J.R.D. to the Mughal Empire in decline – losing its grip on various companies like the Mughal emperors lost their grip on their various satraps (subordinate regional rulers). Ratan, then 56, seemed something of a geeky technocrat, the very opposite of the flamboyant, charismatic J.R.D. But he was just what Tata needed. With mighty conflicts and even mightier losses seemingly overwhelming the ailing giant, pundits were predicting Tata’s demise. But Ratan Tata’s plain, no-nonsense approach and his highly effective restructuring of the company proved a winner, and the critics were forced to eat their words, especially as the Tata motor group’s hatchback, Ratan’s brainchild the Indica, proved a stunning success.
Tata has slimmed down the group, and shifted it from being something of an Indian dinosaur, heavily reliant on manufacturing products, to a much broader-based, more dynamic enterprise. In the 1990s, the Tata group was seen as rather cautious and risk-averse. Now it is much more aggressive and fast-moving – hence its spate of hostile takeovers. Interestingly, unlike before, the company is happy to move well outside India, muscling in on foreign companies, too. Ratan believes that ‘Tata and India cannot afford to be just India’. In 2007, Ratan Tata was approaching 70, the retirement age for Tata’s directors, yet he is unmarried and has no children, so there seemed no obvious successor. So Tata simply raised the retirement age to 75, and Ratan is due to be in charge until 2012.
Made in India?
Many of India’s manufacturing firms are beginning to perform very well on the global stage. Some, like Tata, are surging up or breaking into the Fortune 500 of the world’s biggest multinational corporations. But their expansion is not creating any more jobs – if anything the opposite is the case. The growth tends to be capital intensive, not labour intensive. Tata steel made world headlines in 2007 when it took over Anglo-Dutch steelmakers Corus to become the world’s fifth biggest steel makers. Yet as it has grown, its labour force has shrunk. In 1991, its huge Jamshedpur steel mill had a workforce of 85,000 turning out a million tonnes of steel a year. By 2005, the Jamshedpur workforce had dwindled to 44,000, but output was up 400 per cent to 5 million tonnes a year. Other Indian multinationals boast of similar labour efficiencies. In the late 1990s, Pune-based scooter maker Bajaj turned out a million scooters with 24,000 workers. Now it churns out 2.2 million with just 10,000. So it would be a mistake to assume, as many commentators have, that the recent growth of India’s manufacturing sector will necessarily bring much-needed jobs for the ordinary Indian.
All the same, there are signs that India’s manufacturing sector is beginning to capture some of the aura of success of the IT industries. Much of the economy’s accelerating growth in the last few years can be put down to manufacturing, not IT. And some of India’s manufacturers are becoming truly global players. India Inc. seems to be on something of a roll with a spate of global mega-mergers and hostile takeovers. As well as Tata’s takeover of Corus and Jaguar/Land Rover, for instance, there was Hindalco’s acquisition of the world’s largest producer of aluminium products, Novelis, and Lakshi Mittal’s takeover of the world’s largest steelmaker, Arcelor. Other Indian firms such as Videocon, Moser Baer, Bharat Forge and Reliance Industries are all making a splash. When the Boston Consulting Group identified 100 new global corporate challengers, they picked 21 firms from India.
JUGAAD
Jugaad is an Indian word that has no direct equivalent in English, but it sums up a never-say-die spirit and genius for improvisation, invention and making the most of things. Jugaad is a quality many Indians have in abundance. They show it in a genius for spotting and making the most of business opportunities in the most unlikely situations. Mumbai’s famous dabbawallahs, who take homemade lunches to workers (see here), are a classic example of the spirit of jugaad. Indians show jugaad, too, in their amazing ability to conjure tools and machines out of cast-offs and junk, like the Maruta of Punjab, a locomotive cobbled together out of planks and cannibalised parts, and the motorcycle tractor created by a farmer in Gujarat. Often, of course, invention is born of necessity, but jugaad has become a part of the Indian way of life, so much so that Indians are veritable geniuses at recycling. Nothing is thrown away if it can be used again. Envelopes, gift wrapping, food packaging and everything imaginable – and some unimaginable – are carefully saved and used again. Recently it has even become the trend to recycle gifts, passing them on to the next grateful recipient – sometimes even in the same wrapping. The environmental benefits are clear. India recycles 60 per cent of its plastic waste, compared to just 12 per cent in Japan.
India beckons
But it is not just Indian firms that are making headway. Until recently, foreign multinationals largely moved in on India to find sales in its swelling middle-class market. Now, however, some are beginning to contemplate actually moving to India to take advantage of low costs and abundant natural resources. Korean steel giant Posco is hoping to build a US$12 billion mill near Orissa (once they have found a site that doesn’t arouse local opposition) and mobile-phone company Nokia has opened a factory in Chennai (Madras). Indeed Chennai seems to have become something of a magnet for carmakers with its easy access to the sea and low-cost resources. In 2006, Hyundai opened a billion-dollar plant here, and is already building a second. BMW got under way with building in spring 2007. And now Renault and Nissan are starting work on a giant new car plant at Nashik near Chennai in association with India’s Mahindra & Mahindra.
There is no doubt that the gradual easing of some of India’s restrictive licence regime is helping – and so is the rise of India’s middle class. Indeed, India has become a major market in itself, and manufacturers are drawn here to be near a major market. India is, for instance, one of Nokia’s five biggest markets, accounting for thirty million sales in 2005 alone. Nokia’s India boss Jukka Lehtela explained Nokia’s move to Chennai very simply: ‘We became eager to get closer and closer to India.’
Another factor for the multinationals may be concern about dependence on China as a manufacturing base. China may offer much lower labour costs, but it is further from European and Middle Eastern markets, and the regime puts some companies off.
ENTER THE ENTREPRENEUR
Since 1991, as if they were just waiting for the chance to emerge, a multitude of Indian entrepreneurs have shown their talent for business. A few come from old business backgrounds, but many are the first businessmen – and it is mostly men – in their families, and there are countless genuine rags-to-riches stories. There’s Subhash Chandra, the media giant sometimes called the ‘Murdoch of India’, who was born the son of a provincial cottonseed dealer and is now worth US$2.5 billion. There’s C.K. Ranganathan who turned the idea of selling cheap shampoo to poor country people into the multimillion dollar business Cavin Kare. Naresh Goyal started as a humble airline employee but when India introduced its Open Skies policy with the financial liberalisations in 1991, Goyal seized his chance and went on to create India’s top domestic airline, with annual revenues of half a billion dollars. Nowhere of course has the Indian entrepreneur thrived with such vigour, though, as in the IT and pharmaceutical industries, where thousands of Indians have become millionaires and hundreds billionaires.
Crumbling infrastructure
All of this promise, though, may be brought to a grinding halt by India’s crumbling infrastructure. The high-tech industry that started India’s boom doesn’t rely on roads and bridges to get its products to market; manufacturing does. Yet good highways, bridges, airports, power and water supplies are something India hasn’t got much of. And what’s there is collapsing under the weight of increased demand – sometimes literally as when a road bridge in eastern India gave way in December 2006 under the weight of traffic and crashed on to a train beneath, killing 34 people. Meanwhile, the electricity supply to the city of Pune, a city of 4.5 million people, is so under stress that the entire supply has to be cut off for one day every week to relieve some of the pressure – leaving businesses to rely on their own back-up generators or face a shut down.
Moving goods around India can be something of a nightmare. In the monsoon season, water-sensitive goods can be stuck in leaky storage facilities for days while waiting for roads to become passable. Even once they get moving, journeys that would take less than a day in other countries can take many days in India. Average speeds on India’s overcrowded main roads are barely 20 mph, and hold-ups are frequent. It can take 10 days for the Japanese carmakers Suzuki to truck its cars just 900 miles from its factory in Gurgaon (one of New Delhi’s new satellite towns) to the port of Mumbai – not just because of the poor, overcrowded roads, but also because of long delays at state borders, and the ban on large trucks from many of India’s cities during the day. Altogether, India has just 3,700 miles of motorways – which compares with China’s 25,000. No wonder, then, that many foreign companies choose to locate in China in preference to India, despite the caveats mentioned earlier. Even more depressingly, 40 per cent of India’s entire food production is lost because transport delays allow it to rot before it reaches consumers.
On the road to the future?
Some economists believe that the lack of good roads, railways and power is cutting India’s economic growth by several per cent each year. It is also ensuring that economic growth, far from benefiting India’s eight hundred million poor people, is simply widening the gap between the haves and the have-nots as money is focused more and more on those few places that do have decent infrastructure.
Now, at long last, after years of turning a blind eye, the Indian government seems to have woken up to the scale of the problem. ‘We have to improve the quality of our infrastructure,’ Prime Minister Manmohan Singh said in spring 2007. ‘It is a priority of our government.’ And it has to be said that some progress has already been made. The Golden Quadrilateral of motorways linking India’s big four cities – Mumbai, Delhi, Kolkata and Chennai – was completed in 2007. New Delhi’s slick new metro is well under way. And Bangalore and Hyderabad both have new airports under construction. But there is still a long way to go. So Prime Minister Singh is launching a gargantuan plan to improve India’s infrastructure. Some 330 to 550 billion dollars is to be spent on roads, airports, ports and power generation between 2007 and 2012.
With India’s massive public debt, there is no way all this money can come from the government. So the government is embarking on a huge public–private partnership to draw in private funds, offering very generous deals, with investors recouping revenues for decades before finally handing things over to the government. Interestingly, if this plan comes off, it could mean massive investment opportunities for infrastructure companies willing to take the risk. India is a very big, populous country, and if the infrastructure begins to stimulate development, the potential dividends are huge. So, foreign multinationals such as General Electric are beginning to eye up the juicy possibilities.
INDIA’S DRIVING AMBITION
For any foreigner, driving through the streets of India’s traffic snarled cities is something of a nightmare. Yet millions of Indians are just itching to join in. Car ownership in India is just beginning to swell rapidly. The number of car owners in India seems to be virtually doubling every five years. At present, 7 Indians in every 1,000 own a car. By 2010, 11 in 1,000 will. That might not seem so many proportionally but that’s still some 120 million cars.
Carmakers are expecting that India will soon be the seventh largest market for cars in the world, with 2.5 to 3 million new cars being bought every year. Of course, there are many hundreds of millions of Indians for whom the idea of even a ride in a car, let alone owning one, is beyond imagining. But although proportionally India’s new middle class is tiny, it is still a huge number of people – and a huge number of potential car owners.
The result is that India’s car industry is beginning to boom like the IT business. For decades, government restrictions and lack of money meant that India’s roads were dominated by the ancient Ambassador. Now all kinds of new makes are flooding on to the roads. Not just India’s homegrown popular hatchback, the Tata Indica, but foreign marques as well. And automakers are even beginning to set up factories in India to export to the world. Chennai is fast becoming a world centre for car-making, with Ford, Hyundai, BMW, Renault and Nissan all setting up major factories here. It remains to be seen what will be the impact of Tata’s ultracheap $2,500 Nano, introduced in January 2008. The world’s cheapest new car ever, it could be affordable by many millions of Indians.
Of course, India has a chronic shortage of roads for this queue of new cars to drive on – and traffic jams are becoming the norm. New motorways are being built, but they are lagging far behind the growth in car ownership. Optimists in the car industry insist that the rise in car ownership is just what India needs to stimulate a demand-led development of the road network.
A sorry state
Unfortunately, there is yet another major obstacle to economic success: India’s politics. First of all there is the corruption on a huge scale that is part of the Indian political way of life. At least a quarter of any public money allocated to a project is certain simply to vanish in one way or another – sometimes much more. Then there are the promises Indian politicians have to make to the voters to ensure they are elected. If one party offers cuts in electricity prices, then so must the others, if they are to be elected. Any politician who tries to make decisions for the future is in danger of being thrown out by voters concerned only with the here and now. Of course this is true in any democracy, but in India, with its plenitude of parties, it seems de rigueur.
A few years back, chief minister of Hyderabad Chandrababu Naidu helped turn that city from something of a backwater to India’s high-tech hub, building the infrastructure and providing the land that drew a raft of foreign IT giants here to create India’s own version of Silicon Valley. The whole city has benefited from the influx of business and wealth. Yet in 2004, despite this obvious success, Naidu was voted out of office, largely because his opponent promised electricity subsidies (though there is another way of looking at this). The warning signs for any politician trying to plan infrastructure developments are obvious.
Nevertheless, it can be done, as Sheila Dikshit, chief minister of New Delhi, has shown. Dikshit certainly came face to face with the same problems as Naidu and she ran into severe problems when she tried to contract out water supplies to private companies in order to deal with massive wastage. But the first phase of New Delhi’s fantastic new metro was completed on time and under budget in late 2005, and it is well on target for the next phase. Dikshit was also a key player in a scheme that has cut New Delhi’s air pollution substantially by converting all the city’s public transport to run on CNG (compressed natural gas). The result of these changes is that life has improved enough in New Delhi – not long ago one of India’s most dirty, chaotic cities – for many people to consider moving to New Delhi out of preference to Mumbai.