India, long-term sustainable growth?
Written by Alfred Tuinman, published in FM Corporate (Nr 1 Vol 1, Nov 2005)
It was sometime after midnight that day in November 1982, that I experienced my first exposure to India. I was being driven through the dark streets of Bombay to my destination. I was to soon to recover from my long flight from Sydney. At various points I could see people huddled around little campfires on the side of the road. That together with the dilapidated buildings made me think of the war movies I so often had watched. In this part of the world colour TV was still to be introduced, neither were the bookstalls full of flashy magazines and not a single spunky car in sight. But that was 1982.
In 1991 the Indian government, under pressure to adjust to the breakup of the Soviet Union, started the economic reforms. With slow, careful and with well-considered measures it cast off the threadbare mantle of socialism prevalent during the Gandhi era. It allowed automatic approval of foreign investment in those areas where it considered it welcome. It has been using its huge community, by and large well to do1, living outside its borders, as a test bed for its reforms.
Today India is aiming for a seat in the Security Council. GDP averaged 5-6% per annum over the last decade. It is being mentioned in one breath with China when one talks of the Emerging Economies. The sturdy Ambassador car had to make way for snazzy sedans. The use of consumer durables has witnessed a rapid expansion. The telecom industry has jumped technologies. Software production runs at top speed. It is therefore with a certain amusement that I now hear people talk positively about India. What has changed the image of India? The answer is simple. Success!
The reason why India is a beneficiary of such an influx of investments is not difficult to see. Economic growth is also the result of perception, not just financial key indicators. The confidence of the Non-Resident Indian community is backed up with solid data though. Foreign exchange reserves have been over $100 billion since the end of 2003. In contrast to Europe and China, India has a young population. It is also the 4th largest economy in terms of purchasing power parity. The consumer class, estimated at around 400 million and growing rapidly, has a deeply rooted industrial-entrepreneurial culture. The economic reforms are set to continue. All governments have followed more or less the same strategy. Coincidentally the current Prime Minister, Manmohan Singh, was the chief architect of the reforms in 1991, then as Finance Minister.
The number of universities is limited and the entrance exams therefore excruciatingly difficult. The language medium is often English. The successful output is therefore high, very high. Despite this the labour costs are still highly competitive due in part to India still being a large ‘power distance society’ (2). Other growth drivers are access to lower costs of funds, the ‘open window’ to Foreign Direct Investments, as well as the huge existing IT industry.
The government though has to bolster its judicial system. While there is an excellent legal system in place, legal proceedings are often so slow making it in effect obsolete. This is particularly embarrassing when it concerns court cases against sitting Members of Parliament. An effective judiciary is required for (foreign) investor confidence as well as domestic stability while the economic disparity grows. The government is addressing infrastructure problems by means of 5-year tax holiday schemes and as such create huge investment opportunities. Also tax benefits for Export Oriented Units provide the desired stimuli.
Indian industry has to increase its quality levels. It often is too focused on cost rather than on continued R&D. The reason for this is that the Indian domestic market is still, by and large, very price sensitive. The IT industry however has understood this and is moving away from simple programming to value added services such as offering FSSC services. Quality assurance is crucial for continued growth. Privately held Reliance Industries has understood this and its 660,000-bpd refinery at Jamnagar ranked therefore best in the Shell Benchmarking for the third consecutive year (3).
Geert Hofstede once called cultural differences ‘a nuisance at best and often a disaster’ (4). Already an impressive 77% of the foreign companies are making a profit with a further 9% breaking even.(5) The success lies in the ability to understand and adapt to the Indian work culture. Unfortunately Dutch entrepreneurs often display a misplaced arrogance. Their directness is uncomfortable in a culture where saying ‘no’ is impolite. Our Germanic punktlichkeit is also often not understood in India. Time in India is more an abstract term and tomorrow does not necessarily mean in the next 24 hours. International growth depends therefore on a mutual understanding. Like Robert Kaplan suggested we do for a company (6), we should also do when looking at investing in a country: do not just look at financial data but also at their belief systems.
A recent study (7) by The Netherlands Foundation for Business Process Innovation8 in conjunction with the Erasmus University highlighted that Dutch corporate culture is a limiting factor. Successful implementation of projects IT or FSSC offshoring should therefore be managed by someone with a decent amount of experience with India. This is worth far more then having an in-depth knowledge of Prince2 or ITIL. A preventive health check is better then remedial action.
The Indian economy has all the key ingredients: stability, size and stamina. It therefore will continue to grow at a healthy growth rate, of that I am certain. People more qualified to do so, the analysts, forecast it to grow at 5-10% annually.
1 Merrill Lynch press release May 14, 2003
2 Geert Hofstede’s analysis see www.cyborlink.com/besite/india.htm
3 in ‘Energy and Loss’ performance from amongst 50 refineries worldwide
5 FICCI’s FDI survey findings in 2004
6 the Balanced Score Card as outlined by Robert Kaplan
7 ‘Considering offshoring – the case for India’ available for $30 from the NS BPI
8 The NS BPI facilitates the introduction of Dutch clients to qualified international providers of custom tailored solutions. As such it sees opportunities to make use of Indian suppliers to improve their processes.