Indian business is in supremely self-confident mood. But is its optimism justified? Corruption remains a key restraint on progress. By Jeremy Warner in Delhi
Published: 12 December 2007
Now what credit crisis is that? There could scarcely be a better antidote to the gloom which grips Western markets than a visit to India, where the mood among business leaders in sharp contrast to the downbeat pessimism of the developed world is one of rampant self-confidence and can-do determination to succeed. If the world economy has indeed "decoupled", with the fast growing developing economies of Asia able to remain largely immune to the slowdown in the US, then India perhaps more so even than China is the living embodiment of the breakdown of these linkages.
To bankers and business people here, the credit crunch is but a scarcely noticed rumble of distant thunder of little, if any, significance to an economy whose annualised rate of growth is now kissing 10 per cent.
At last week's India Economic Summit, organised by the World Economic Forum in association with the Confederation of Indian Industry, the mood was one of unbridled optimism, despite the country's many economic and social challenges.
In a mark of this new found self-confidence, India's finance minister, Palaniappan Chidambaram, predicted that next year outward bound investment by Indian companies would for the first time exceed fast-growing inward investment by foreigners keen to tap into India's explosive growth story.
The two front-runners for Jaguar and Land Rover, which have been put up for sale by Ford with an expected price tag of $1.5bn to $2bn (£980m), are both Indian – Tata Motors and Mahindra & Mahindra. One of these is likely to be named preferred bidder at some stage in the next month or two, with the effect that together with the steel maker Corus, bought earlier this year by Tata, a very substantial part of Britain's remaining manufacturing base will have passed into Indian ownership.
Nor could anyone have failed to notice the takeover by the flamboyant Vijay Mallya of the scotch whisky company Whyte & Mackay. Mobbed in the manner of a Bollywood film star as he struts the conference rooms of the India Economic Summit, he has become the living embodiment of the self-belief, verging on arrogance, of India's new business élite.
Less well-reported examples of Indian acquisitiveness overseas are the pharmaceuticals company Ranbaxy Laboratories, whose chief executive Malvinder Singh, points out that he has done 18 overseas acquisitions in the last two years, and India's world-class IT services industry, which has been similarly active overseas. Indians are these days more likely to be found rubbing shoulders with the élite of global business than their counterparts in China.
Yet the emergence of India as a serious player in global M&A, though undoubtedly indicative of the country's new-found influence on the world economy, is no substitute for economic development at home. With some 80 per cent of a population of 1.1bn living on 25 rupees a day or less (30p), there is plainly still a way to go before the geo-economic power shift from west to east that so many now talk of becomes a reality.
In most respects, the idea is still little more than fanciful. The "inclusive" growth that India aspires to is also at this stage just a pipe dream.
The development challenge for India is not the 250 million people officially defined as middle class – those with sufficient income for discretionary spending – but the much greater numbers which are still dependent on subsistence farming or eeking out a living in the slum dwellings of India's major cities.
The economic anomaly that India has to confront is that the more than half the population which is still rural accounts for just 20 per cent of the country's output, with the infrastructure of the cities already so stretched and broken by migration from the land that they cannot without risk of extreme social dislocation absorb any more.
Perhaps oddly, the effect so far of the Western credit crunch on India has been mildly positive. Some of the excess liquidity which otherwise would have flowed into complex western debt instruments has instead been diverted into emerging market equities, helping to feed the boom in the Indian stock market.
It's a funny old world that sees Indian equities as lower risk than previously triple-A-rated Western debt markets, but for the time being that's the way of it.
Yet whatever the protestations of its business leaders, it seems unlikely that India can altogether escape the adverse consequences of the Western credit crisis. India is more "coupled" to what's going on in Western economies than it would like to think. The credit crunch will for starters quite severelylimit India's new-found penchant for foreign acquisition making. India is just as affected by the closure of debt markets to leveraged finance as privateequity.
Ranbaxy has already had to pull one major transaction because of prohibitive financing costs. Speculation in the Indian press that Tata might counter BHP Billiton in the bidding for Rio Tinto, thus shoring up the country's need for iron ore supplies to feed its fast-growing steel mills, are frankly just delusional in today's markets.
Tata would have struggled to finance the acquisition of Corus had it been trying to do so today. The infinitely larger amounts necessary to acquire Rio are a non starter.
Meanwhile, Indian exports are likely to be hard hit by any generalised economic slowdown in the West. The booming IT sector will also find its growth crimped by more difficult trading conditions in the US.
Ambitious government plans to increase infrastructure spending by some $500bn over the next five years, much of it slated to be privately financed, is likely to be quite significantly affected by the freezing up of global credit markets.
The bigger constraints on Indian development are nonetheless of the more home-grown variety. India's notoriously poor infrastructure of power, water, sanitation, roads, rail and airports – together with the apparent inability of government to do anything about it – is just the half of it. Nor are the extreme challenges around education, training, health and nutrition the biggest bug-bear.
Rather, it is corrosive, debilitating corruption, which runs through all levels of society from the lowest to the highest, and creates a massive barrier to the deployment of foreign capital and the development of efficient markets. Yet it is an issue few Indian business and political leaders are prepared to even talk about let alone confront.
There was, for instance, no session amid all the self-congratulation of the India Economic Summit on corruption, though in fairness it was referred to in a breakout debate on the difficulties of introducing Western standards of supply chain management into India.
Low levels of public sector pay have helped make bribery a part of everyday life. Only very slowly has private sector development, which brings with it Western standards of pay and best practice, begun to make inroads into a pattern of behaviour still widely thought of as perfectly normal.
A common observation among Western business people with experience of working in both India and China is, yes, India with its fast-growing, youthful population and relatively high levels of consumption, is a terrific market opportunity, but – and here the aside is whispered behind the hand – "it is so much better in China" .
There is of course plenty of corruption in China, too, but the difference is that in China a real effort is made, from the top down, to engage with business and address its problems. If a road needs to be built to facilitate an investment, it gets built to order and on time.
Against China's forced march, India has more chaotic, private sector-driven approach to development. This may have the merit of being more consensual, but it also makes the system more open to abuse.
India is said to have more than 250,000 separate democratic institutions. Against China's rule of the gun, India is ruled by the ballot box. In such a paradise of representation, national priorities become eclipsed by regional concerns, interests and sovereignties. In any system where there is debate and room to object, progress is bound to be slower and more cumbersome. What should be a democratic dividend, making India a more obviously attractive destination for Western investment and know-how than the one-party state of China, instead frequently becomes a positive liability.
Yet it requires only the briefest of visits to India to understand that it is not democracy as such which is at the root of the problem. Rather it is powerful vested interest and corruption which through high levels of loyalty and deference down through the matrix of society that have become entrenched in the democratic process.
Says one leader of a multi-national company with extensive interests in India: "You know, India is a wonderful country, but it is a bugger of a place to do business in, a real bugger, worse than anywhere else I've had experience of, worse than the Middle East.
"The market is huge and fast growing, but every step of the way it is a struggle. It shouldn't be so difficult. It could be made so much better. But nothing is going to change in a hurry".
This may be an unduly pessimistic prognosis, but it contains large elements of truth. Corruption of the commercial and political process is present at all levels of society, from the free services and goods that street traders are obliged to give local police and officials to prevent crippling bureaucratic interference to the protections and barriers to entry that are enjoyed by some of India's leading business dynasties.
Rules and regulations are routinely changed or tampered with to favour one commercial interest over another, depriving the market of the level playing field it needs to develop internationally competitive industries. This may not be corruption as such, and all political systems however sophisticated, are to some extent prone to such manipulation. Yet it is more overt and wide-ranging in India than perhaps anywhere else.
One current example is the row over new mobile phone spectrums, which had been promised to existing GSM operators but which two of India's most powerful business dynasties, Anil Ambani's Reliance and the still family controlled Tata, are trying to muscle in on.
Mobile telephony has been one of the great Indian success stories of recent years, hugely innovative and adaptive as penetration spreads beyond India's urban middle class down into the lower income groups, where the cost of both handsets and call charges have to be kept to a bare minimum to gain traction.
Handsets can be bought for as little as $20 and pre-paid top ups are sold in 10 rupee chunks, enabling 5-7 minutes of airtime. The mass provision of connectivity is an essential element of the social and economic empowerment that India so desperately needs to lift its population out of poverty. The mobile phone companies are making extraordinary progress in helping bring this about, yet at every turn their progress is hampered by bureaucratic interference.
Unlike other forms of infrastructure, there is no problem of lack of investment in mobile telephony. Vodafone Essar, the second-biggest operator, is spending at the rate of $2bn a year, while the largest, Sunil Mittal's Airtel, will be spending even more.
Existing capacity is already stretched to breaking point. To keep growing as planned, the GSM operators need more. Yet here comes Messrs Ambani and Tata, both of whom have mobile companies licensed to use the alternative, and as it has turned out more expensive, CDMA operating standard, to argue that in order to create more competition in the market, the promised extra GSM spectrum should go to them instead.
Having essentially chosen a technological cul-de- sac as their way into mobile, their natural sense of entitlement makes them think the rules should be changed to give them access to the faster-growing GSM market, too. Never mind the billions of investment by the likes of Mr Mittal predicated on understandings that were meant to be set in concrete, or the fact that if scarce capacity is shared between multiple operators, it is much more likely to create an unsatisfactory oligopoly than more competition.
Mr Mittal has expressed outrage at what government-controlled regulators seem minded to do. Their decision will be a test case of public policy as it relates to business in India. Without certainty as to the public policy framework, business can't and won't invest.
In China, it is often said, business succeeds because of government; in India, it is in spite of government. The challenge of dealing with often corrupt bureaucracy in itself helps create a hugely entrepreneurial and inventive society. Yet it is also a profound barrier to change, which left unaddressed, will continue to cost India dear.
As one of the co-chairs of the India Economic Summit, Ben Verwaayen, chief executive of BT, says he feels more inspired about the need for corporate change by coming to India than ever he does sitting in his office back in London.
This is the future, he says, gesturing to the world outside – a fast-growing middle-class consumer market that will soon be bigger in terms of numbers than the European Union.
But to achieve its proper potential it must rise to the challenge of lifting hundreds of millions out of poverty so that they too can join the burgeoning ranks of Indians already bought into the global economy.
Connectivity, in his view, provides many of the answers to India's economic and social challenges, including perhaps, ultimately, corruption, too. There is nothing like communication to make people realise they are being disadvantaged.
India is at least 10 years behind China in terms of its development profile. The free market reforms that led directly to the explosive growth we are seeing today throughout much of the developing world came later in India than China. Yet India's market opportunity is potentially much bigger, with a faster-growing and more youthful population.
These characteristics have the potential to be as much of a curse as a blessing. Yet whatever the outcome, no business which still expects to be around in 20 years time can afford to ignore the challenges they represent.
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