India Globalization

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India Globalization Convergence

• Week 9

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What benefits does India have?

• One of the largest economies in the world.
• Strategic location - access to the vast domestic
  and South Asian market.
• A large and rapidly growing consumer market up to
  300 million people, estimated to be growing at 8
  per annum.
• Demand for several consumer products is growing
  at over 12 per annum.
• Foreign investment is welcome, approval is
  required but is automatic in sixty categories of
  Industries.
• Skilled man-power and professional managers are
  available at competitive cost.
• One of the largest manufacturing sectors in the
  world, spanning almost all areas of manufacturing
  activities.
• One of the largest pools of scientists,
  engineers, technicians and managers in the world.

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What benefits does India have?

• Rich base of mineral and agricultural resources.
• Long history of market economy infrastructure
• Sophisticated financial sector.
• Vibrant capital market
• Well developed RD infrastructure and technical
  and marketing services.
• Complete exemption from Customs Duty on
  industrial inputs and Corporate Tax Holiday for
  five years for 100 per cent Export Oriented units
  and units in Export Processing Zones.
• A long history of stable parliamentary democracy.
  

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Capital Markets

• 23 stock exchanges across the country
• Major Exchanges
• The Stock Exchange, Mumbai (BSE)
• The National Stock Exchange (NSE)
• Exchange regulation via Securities and Exchange
  Board of India
• Both BSE and NSE provide fully automated, screen
  based trading systems
• There are approximately 7,300 companies listed on
  the BSE and 800 on the NSE

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Comparison with China

• Socialist China
• Independent India
• Massive Economies
• China 21 world population
• India 16.5 world population
• Why is India not challenging China?

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Why the lack of development?

• Slow development of economy
• Lack of privatisation
• Protectionism
• Restrictive Labour Laws
• Over subsidisation of State-owned enterprises

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Privatisation

• Why has privatisation been so slow?
• Historic precedents post-independence
• Under 5 year plans Indian government took
  responsibility for investment and direction of
  private sector
• Should market forces dictate resource allocation?
• Indian economy has such extreme disparities in
  incomes that the free market as allocator of
  resources carries too much risk

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Privatisation

• Private sector did not have sufficient resources
  nor
• Could it be expected to bear long-term small
  returns on projects
• SOEs as social safety net
• The overriding problem of poverty

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How to solve poverty

• Nehru, Premier from 1947 to 1964, saw
  industrialisation as the key to alleviating
  poverty
• Believed a powerful state with a centralised
  planned economy to be essential if the country
  was to industrialise rapidly
• Poverty reduction through industrialisation
  guides economic policy
• Has become ingrained belief
• If policies which support industrialisation are
  altered then poverty will increase

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Poverty Levels
Year All India Rural Urban
1973 54.9 56.4 49.0
1978 51.3 53.1 45.2
1983 44.5 45.7 40.8
1988 38.9 39.1 38.2
1994 36.0 37.3 32.4
1999 26.1 27.1 23.6
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Protectionism

• Isolating Indias economy from rest of world
  reduces effects of external shocks
• Method
• High tariffs to prevent imports
• Effect of 1991 financial crisis
• dismantled investment and import licensing
• removed dysfunctional controls on capital issues
  and foreign investment.
• Tariffs were reduced from an average of 87 to
  25.

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Protectionism

• Positive effects
• Avoided effects of Asian crisis 1997
• Less impact of world economic slowdown
• Negative effects
• Historic capital controls
• Low levels of FDI

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FDI

• India is not a favourite destination of foreign
  investors
• Total inflows of foreign direct investment was
  around 2.2 billion in 1999
• Compared to Thailands 6 billion and Chinas 40
  billion
• Or
• 2001 FDI in India ½ of GDP
• 2001 FDI in China 5 GDP

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FDI (or lack of it)

• Lack of FDI led to self-funding of
  industrialisation via government credits
• One of the contributory causes of the
  macro-economic crisis of 1991 was the combined
  fiscal deficit of central and state governments
• Ran at unsustainable 10 of GDP

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Bringing in FDI

• Structural and regulatory changes are required to
  boost FDI
• Which will increase growth in economy
• And provide spillover effects
• Barriers to FDI
• cumbersome approvals process
• questions regarding the legal system
• regulatory impediments to doing business
• poor infrastructure
• perceived slowdown in the pace of economic reform

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Reform Programme

• Programme of reform instituted since 1991
• But still retain problems with
• Lack of commitment to full privatisation of
  SOEs
• Since 1991 minority equity sales have occurred in
  only 40 of the 240 central public enterprises
• Failure to implement strong bankruptcy laws
• Failure to reform labour laws

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The grip of organised labour

• Rigid labour laws have long been identified as
  obstacles to growth and equity
• Probably the most highly protective of labour
  interests in the world.
• There is practically no link between output and
  remuneration - hiring and firing are highly
  restricted.
• It is extremely difficult to maintain an economic
  level of productivity or improve productivity.
• The present form of protection of organized
  labour constitutes about 5-6 of the whole
  population

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The grip of organised labour

• This tiny labour aristocracy is employed in the
  public and organized private sectors.
• They do not represent the interests of the
  overwhelming majority of Indias workers, who are
  either self-employed or work as casual labour
• They do not enjoy job protection or any other
  benefits conferred on the aristocracy by the
  labour laws.
• The aristocracy also consists of members of one
  or the other of the labour unions affiliated with
  ruling and opposition political parties.
• Labour unions has been particularly effective in
  preventing privatization of public sector
  enterprises
• Some privatised companies have no social utility
  value (eg hotels, airlines)

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Indias problem is bureaucracy, not democracy

• The combination of
• Vested interests
• Continued reliance on belief in industrialisation
  as key to poverty and
• The need to retain protectionist measures to
  sustain industrialisation
• Leads to slowdown in growth and development

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Evidence against

• Improvement in poverty since 1991 start of reform
• No matter what the data source, survey or
  national accounts, growth is shown to lead to
  poverty decline, almost one for one
• No growth, no poverty reduction is the only
  conclusion

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WTO and the end of protectionism?

• As signatory to Uruguay Round agreement 1994
• India has removed quantitative restrictions on
  imports of agricultural commodities and consumer
  goods
• But replaced with high tariffs
• Has stated will use all steps available under WTO
  rules to protect economy from imports
• Is 4th largest user of antidumping regulations
• Is most protected economy in Asia

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Economic Conclusion

• Despite a range of impediments
• There is slow reform
• Reform positively assists poverty reduction
  through growth
• To sustain growth further liberalisation of all
  economic aspects must continue
• Merrill Lynch believes that GDP will grow by an
  average of 8.5 a year in 2005, 2006 and 2007,
  buoyed by rises in foreign investment

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Entrepreneur effects

• Need to stimulate small business
• More acute access to funds
• Higher investment in education at low end
• Development of labour intensive export potential
• Skewed to hi-tech without much positive export
  success
• Foreign business opportunities in privatisation
  of infrastructures

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Prahalads imperatives for management

• India has hardly felt the impact of SE Asian
  crisis.
• While many think it is good news, actually it is
  not.
• It means that after five years of active
  liberalization, India is still not part of the
  global economy.
• It is at best a marginal, global player.

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Prahalads imperatives for management The New
Economy

• Deregulation Privatisation
• Globalisation
• Open Standards
• Digitalisation
• Volatility
• Focused Competitors
• Eco sensitivity
• Transparency Accountability
• Indian managers must come to terms with the fact
  that they represent about 20 of humanity and
  that they should have a say in how the global
  economy evolves

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Practical level pragmatism - management practice

• Gopalan Stahl (2001)
• Argue for cross-vergence hybrid combination of
  domestic imported concepts
• Widespread usage of English
• Familiarity with western education
• Urban access to internet
• Lead Indian management thinking to a point where
• Some ideologies equate to western practice (ie
  reject Indian national cultural values)
• Others reflect national cultural values
• combination of indigenous imported approaches
  to managing people at work
• suggest eg Loyalty will be strong
• preferential hiring of family members will be weak

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Business performance

• Rajpal Sagar (2003) identify that performance
  of Indian business is good at MNC level but
  problems emerge lower down
• They suggest local businesses are in need of
  radical improvement if they are to meet global
  challenges (Chinese)
• Need to develop key traits
• Having key customer insights
• Focusing business strategies on customer value
• Quality commitment
• Upgrading knowledge processes
• Management by facts feedback

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The key of privatisation

• Gupta (2005)
• Most privatization programs begin with a period
  of partial privatization in which
• only non-controlling shares of firms are sold on
  the stock market.
• Since management control is not transferred to
  private owners it is widely contended that
  partial privatization has little impact.
• This perspective ignores the role that the stock
  market can play in monitoring and rewarding
  managerial performance even when the government
  remains the controlling owner.
• Using data on Indian state-owned enterprises we
  find that partial privatization has a positive
  impact on profitability, productivity, and
  investment.