There is a pronounced “feel good” in the air about the Indian economy. Growth figures are good. Nearly everyday, forecasts for production in the current year are being revised upwards.
There is a cynical view that it is merely the rain god who is responsible. It is felt that the bounce in agriculture alone is the source of the change in GDP growth. If this is the case, then the optimism can only be shortlived.
Kelkar, Shah How superficial is the economic optimism? Is it merely strong growth in agriculture or is the rest of the economy also faring well? Is it merely a response to agricultural recovery or are expectations about the future more optimistic?
Owing to lags in the statistical system, a great deal of information about the first half of ’03-04 is not yet known. But in some sectors, we do have useful early indicators. The corporate sector has done very well this year, with strong growth in sales and profits. There seems to be some revival in manufacturing investment. Clearly there is something deeper going on; it is not just a good monsoon. Let us take a few snapshots from the enormous landscape of the Indian economy.
Infrastructure: We seem to have spent a decade complaining about bad infrastructure, but finally some pieces actually seem to be faring well.
In a recent month, we added two million mobile phones, an event that made the global telecom industry sit up. Prices have crashed. In a truly ironic reversal of roles, land lines are now a luxury, mobile phones are cheap and ubiquitous.
The turnaround time at our ports has come down by half. And we are finally getting the first high-quality highways in our history. We used to build 11 km of highway per year; we are now on the verge of building 11 km of highway per day.
Services exports: Ten years ago, we started exporting software. This sounded like an elitist thing, where a handful of top universities would produce computer engineers for the software export industry. That industry was enormously broadened owing to an explosion in private and public production of IT skills.
But then IT exports have metamorphosed into the much wider field of services exports, where all kinds of services (and not just software) are being exported. Its components include call centres, financial back offices, database creation.
A whole range of labour-intensive activities can now be traded on international markets, thanks to improvements in telecom. India is the country best equipped to harness this.
Securities exchanges: India’s stock exchanges are state of the art. Numerous other countries are trying to learn how we did it. We are among the first countries to move to a very tight lag of only two days between selling shares and getting the money.
The success of our equity derivatives market is the envy of other developing countries. Our National Stock Exchange is the third largest exchange in the world, in terms of number of trades. The Bombay Stock Exchange is at rank five.
In 1993, when India first became interesting to FIIs, there was a modest surge in FII inflows and the market infrastructure collapsed. This time around, in 2003, when FII inflows surged, the market processes functioned perfectly.
Automobiles: It is remarkable but true: India is finally learning to make cars. Exports of automobiles and components have roughly doubled from 2000 to 2003. The numbers are still small, but this is a very important development. The automobile sector is the poster child of what can happen when Indian companies are given the right pressure through competition and globalisation.
Leaner, meaner firms: Traditionally India was suffused with pessimism about our firms. We looked at the sheer management quality of foreign firms with sinking hearts.
Foreign firms paid market wages and knew how to hire and fire — Indian firms had low wages, poor HR practices and demotivated staff. We had little hope as we contemplated the competition inevitable between foreign and Indian firms.
When we look back at the past decade, we find many Indian firms couldn’t take the heat — they were bought out or closed down. But myriad new firms were also born.
The survivors of this decade have had to completely transform themselves. For example, from 1995 to 2001 working capital as percentage of sales went down dramatically from 13 to three per cent. This is testimony to the re-engineering firms have gone through.
At the end of this trial by fire, the corporate sector finally looks like a serious player by world standards.
FOR many decades, we in India watched with envy while countries of east Asia embraced globalisation, cut customs duties and obtained export-led growth by harnessing the dramatic rise in world trade in goods in the 1970s and 1980s.
Through outward orientation, they kept the domestic political system from getting mired in local compulsions and exploited world markets for rapid economic growth.
Today we are at a point where we too can play this game, in terms of rapid growth in exports of both goods and services. Our entry is well timed, in being able to exploit the incipient massive growth in global services trade, based on computers and communications. Through this outlook for exports growth, we seem to be within sight of a big leap in development strategy.
When we look at all these changes, it appears clear this is not something superficial. It is not just the monsoon playing out right this year. It is crucial to ask: what caused these changes? In every element, the answer that comes back is: the reforms did it.
Why is telecom faring better? Because a few years ago there was a revolution in policy. It replaced sheltered public sector monopolies with a fiercely competitive industry that included private and foreign players. We privatised VSNL, shifted power away from DOT to TRAI.
Why did turnaround time at ports drop by half? Because we stopped waiting for our port trusts to transform themselves. We started giving out berths on 30-year contracts to international port operators.
Why are we getting the first high quality highways in India’s history? Because we walked away from the traditional PWD methods of building roads, created NHAI, with a new funding stream and a new set of contractual arrangements for building roads.
New institutional mechanisms are crucial. If we had continued to push money down traditional contractual mechanisms, we would have continued to get the traditional substandard roads.
Why did software exports and services exports thrive? A key enabling factor was that telecom reforms gave firms in India the low price connectivity without which we were just cut off from the world.
Why are our stock exchanges world class? Because policy makers took a series of difficult choices in terms of pushing the market into electronic trading, banning badla, banning weekly settlement, banning the telephone market, encouraging new governance structures, creating NSE.
The transformation of the stock exchanges did not happen out of thin air.
Why did the automobile industry take off? Several factors did it. Customs duties dropped sharply, which made raw material cheaper. Reforms made it possible for myriad foreign companies to operate in India. Most important, reforms gave Indian companies the pressure to reinvent themselves, reversing their lack of incentive under the old economic policy.
Why is India’s corporate sector glowing? At the simplest level, the weaker firms died and so the survivors are (by definition) healthier. A marvellous ‘‘creative destruction’’ has been at work, where staff and capital blocked in inefficient firms has been redeployed into stronger firms.
Globalisation has given firms pressure and incentives to either exit or learn to be competitive. We see a sea change in management style. The drop in customs tariffs has forced firms to learn to live while facing competition from foreign goods. At the same time, it has made raw material cheaper and enabled export competitiveness.
Most important, once an Indian firm can compete with foreign goods on Indian soil, without customs tariffs serving to hide incompetence, that Indian firm is ready to fight in the global market.
Customs duties produce stunted, unconfident infants. From the mid-1990s onwards, India has steadily cut tariffs. We are headed for levels of tariffs comparable with those in China, which is the most important element of our being able to compete more effectively with Chinese manufacturing.
Over the past five years, we have made enormous progress in simplifying and rationalising excise duties, a major issue affecting manufacturing firms. We now have an elegant CENVAT framework with exactly two rates.
This year, we dramatically solved the distortionary excise problems that had hobbled our textile sector for 50 years. Finally India will become a credible world player in textiles.
Firms have benefited from a profound change in the mid-1990s: inflation came down, as did interest rates. This was a milestone in India’s 30 year experience. Low inflation has reduced the difficulties of envisioning longterm projects. It has enabled low interest rates. Low interest rates have enabled longterm thinking on the part of companies.
Why did working capital drop from 13 per cent of sales to three per cent? The pressure of competition has definitely been the basic driver. In addition, improvements in telephony, ports and roads have played an enabling role. With better ports, roads and telephones, it is possible to do business while holding much smaller inventories.
All these changes are the product of steadfastly chipping away at difficult problems of economic reforms. These are not quick or simple efforts, and it is easy to complain things aren’t moving in India. But over a slightly longer time-frame, India has successfully executed dramatic change in many areas.
The foundations of our telecom revolution were laid through a set of decisions back in 1998.
Our stock markets got revolutionised by a series of visionary decisions about market design over 1992-1994, followed by dogged and detailed implementation in the following years, followed by a key, courageous decision in 2001.
Tariff cuts are the foundation of healthy manufacturing in India today. They came about, five percentage points at a time, over the past five years.
So the answer to the Indian macroeconomic whodunit seems to be clear: the reforms did it. For many years, the reforms process was criticised as pain and no gain. The results are now manifestly visible.
These experiences have shown us India can execute far-reaching reforms, not just tinker at the margins of old institutional mechanisms and old ways of doing things.
We have tasted the fruits of these labours. We must now come together and put our shoulders behind similar far-reaching reforms in other areas.
There is plenty that remains to be done. We need to go through with a transformation of our income tax system, replacing the culture of exemptions by a simple, impersonal, fair tax system. We need to take control of our fiscal problems through improved tax collection and better focus on expenditures.
These reforms are required in order to meet the targets of the landmark Fiscal Responsibility and Budget Management legislation passed by Parliament this year. Our average customs tariff is still much higher than that in China. The gap needs to be closed.
In infrastructure, we have yet to taste success on railways, electricity, airports and urban infrastructure. We need to learn from the institutional transformation in telecom, roads and ports and apply the lessons to these areas.
In our financial markets, we need to make progress on obtaining open and transparent markets for debt, commodities and currency. We need to learn from the institutional transformation in the equity market.
More important, India has an opportunity to be a global hub for trading in financial instruments, particularly in areas like gold, gold futures and currency futures. We need to reposition our securities markets to play on the global stage.
In the 1970s, India grew at 3.5 per cent per year, which meant that GDP doubled every 20 years. In the 1980s, we accelerated to 5.2 per cent per year. In the 1990s, we went up to six per cent.
What will we achieve in the coming decade? If we stay focused on executing fundamental change, eight per cent is certainly within reach. This will give us a doubling of GDP every 8.6 years!