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India India Globalization & Globalization & ConvergenceConvergence

Week 8Week 8

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What benefits does India What benefits does India have?have?

One of the largest economies in the world. One of the largest economies in the world. Strategic location - access to the vast domestic and Strategic location - access to the vast domestic and

South Asian market. South Asian market. A large and rapidly growing consumer market up to A large and rapidly growing consumer market up to

300 million people, estimated to be growing at 8% 300 million people, estimated to be growing at 8% per annum. per annum.

Demand for several consumer products is growing at Demand for several consumer products is growing at over 12% per annum. over 12% per annum.

Foreign investment is welcome, approval is required Foreign investment is welcome, approval is required but is automatic in sixty categories of Industries. but is automatic in sixty categories of Industries.

Skilled man-power and professional managers are Skilled man-power and professional managers are available at competitive cost. available at competitive cost.

One of the largest manufacturing sectors in the One of the largest manufacturing sectors in the world, spanning almost all areas of manufacturing world, spanning almost all areas of manufacturing activities. activities.

One of the largest pools of scientists, engineers, One of the largest pools of scientists, engineers, technicians and managers in the world. technicians and managers in the world.

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What benefits does India What benefits does India have?have?

Rich base of mineral and agricultural Rich base of mineral and agricultural resources. resources.

Long history of market economy infrastructure Long history of market economy infrastructure Sophisticated financial sector. Sophisticated financial sector. Vibrant capital market Vibrant capital market Well developed R&D infrastructure and Well developed R&D infrastructure and

technical and marketing services. technical and marketing services. Complete exemption from Customs Duty on Complete exemption from Customs Duty on

industrial inputs and Corporate Tax Holiday for industrial inputs and Corporate Tax Holiday for five years for 100 per cent Export Oriented five years for 100 per cent Export Oriented units and units in Export Processing Zones. units and units in Export Processing Zones.

A long history of stable parliamentary A long history of stable parliamentary democracy.democracy.

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Capital MarketsCapital Markets 23 stock exchanges across the country23 stock exchanges across the country Major ExchangesMajor Exchanges

– The Stock Exchange, Mumbai (BSE)The Stock Exchange, Mumbai (BSE)– The National Stock Exchange (NSE)The National Stock Exchange (NSE)

Exchange regulation via Securities and Exchange regulation via Securities and Exchange Board of India Exchange Board of India

Both BSE and NSE provide fully Both BSE and NSE provide fully automated, screen based trading automated, screen based trading systemssystems

There are approximately 7,300 There are approximately 7,300 companies listed on the BSE and 800 companies listed on the BSE and 800 on the NSE on the NSE

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Comparison with ChinaComparison with China

Socialist ChinaSocialist China Independent IndiaIndependent India Massive EconomiesMassive Economies China 21% world populationChina 21% world population India 16.5% world populationIndia 16.5% world population Why is India not challenging Why is India not challenging

China?China?

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Why the lack of Why the lack of development?development?

Slow development of economySlow development of economy Lack of privatisationLack of privatisation ProtectionismProtectionism Restrictive Labour LawsRestrictive Labour Laws Over subsidisation of State-Over subsidisation of State-

owned enterprisesowned enterprises

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PrivatisationPrivatisation Why has privatisation been so slow?Why has privatisation been so slow? Historic precedents post-independenceHistoric precedents post-independence Under 5 year plans Indian government Under 5 year plans Indian government

took responsibility for investment and took responsibility for investment and direction of private sectordirection of private sector

Should market forces dictate resource Should market forces dictate resource allocation?allocation?

Indian economy has such extreme Indian economy has such extreme disparities in incomes that the free disparities in incomes that the free market as allocator of resources carries market as allocator of resources carries too much risktoo much risk

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PrivatisationPrivatisation

Private sector did not have Private sector did not have sufficient resources norsufficient resources nor

Could it be expected to bear Could it be expected to bear long-term small returns on long-term small returns on projectsprojects

SOEs as social safety netSOEs as social safety net The overriding problem of The overriding problem of

povertypoverty

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How to solve povertyHow to solve poverty Nehru, Premier from 1947 to 1964, saw Nehru, Premier from 1947 to 1964, saw

industrialisation as the key to alleviating industrialisation as the key to alleviating poverty poverty

Believed a powerful state with a centralised Believed a powerful state with a centralised planned economy to be essential if the planned economy to be essential if the country was to industrialise rapidly country was to industrialise rapidly

Poverty reduction through industrialisation Poverty reduction through industrialisation guides economic policyguides economic policy

Has become ingrained beliefHas become ingrained belief If policies which support industrialisation If policies which support industrialisation

are altered then poverty will increaseare altered then poverty will increase

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Poverty LevelsPoverty Levels

YearYear All India All India %%

Rural %Rural % Urban %Urban %

19731973 54.9 54.9 56.4 56.4 49.0 49.0

19781978 51.3 51.3 53.1 53.1 45.2 45.2

19831983 44.5 44.5 45.7 45.7 40.8 40.8

19881988 38.9 38.9 39.1 39.1 38.2 38.2

19941994 36.0 36.0 37.3 37.3 32.4 32.4

19991999 26.1 26.1 27.1 27.1 23.6 23.6

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ProtectionismProtectionism Isolating India’s economy from rest of Isolating India’s economy from rest of

world reduces effects of external world reduces effects of external shocksshocks

Method…Method… High tariffs to prevent importsHigh tariffs to prevent imports Effect of 1991 financial crisisEffect of 1991 financial crisis dismantled investment and import dismantled investment and import

licensinglicensing removed dysfunctional controls on removed dysfunctional controls on

capital issues and foreign investment. capital issues and foreign investment. Tariffs were reduced from an average Tariffs were reduced from an average

of 87% to 25%.of 87% to 25%.

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ProtectionismProtectionism

Positive effectsPositive effects Avoided effects of Asian crisis Avoided effects of Asian crisis

19971997 Less impact of world economic Less impact of world economic

slowdownslowdown Negative effectsNegative effects Historic capital controlsHistoric capital controls Low levels of FDILow levels of FDI

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FDIFDI

India is not a favourite destination of India is not a favourite destination of foreign investorsforeign investors

Total inflows of foreign direct Total inflows of foreign direct investment was around $2.2 billion in investment was around $2.2 billion in 19991999

Compared to Thailand’s $6 billion and Compared to Thailand’s $6 billion and China’s $40 billionChina’s $40 billion

Or…Or… 2001 – FDI in India = ½% of GDP2001 – FDI in India = ½% of GDP 2001 – FDI in China = 5% GDP2001 – FDI in China = 5% GDP

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FDI (or lack of it)FDI (or lack of it)

Lack of FDI led to self-funding of Lack of FDI led to self-funding of industrialisation via government industrialisation via government creditscredits

One of the contributory causes One of the contributory causes of the macro-economic crisis of of the macro-economic crisis of 1991 was the combined fiscal 1991 was the combined fiscal deficit of central and state deficit of central and state governmentsgovernments

Ran at unsustainable 10% of GDPRan at unsustainable 10% of GDP

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Bringing in FDIBringing in FDI Structural and regulatory changes are Structural and regulatory changes are

required to boost FDIrequired to boost FDI Which will increase growth in Which will increase growth in

economy economy And provide spillover effectsAnd provide spillover effects Barriers to FDIBarriers to FDI

– cumbersome approvals processcumbersome approvals process– questions regarding the legal systemquestions regarding the legal system– regulatory impediments to doing businessregulatory impediments to doing business– poor infrastructurepoor infrastructure– perceived slowdown in the pace of perceived slowdown in the pace of

economic reformeconomic reform

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Reform ProgrammeReform Programme Programme of reform instituted since Programme of reform instituted since

19911991 But still retain problems withBut still retain problems with Lack of commitment to “full” Lack of commitment to “full”

privatisation of SOE’sprivatisation of SOE’s– Since 1991 minority equity sales have Since 1991 minority equity sales have

occurred in only 40 of the 240 central occurred in only 40 of the 240 central public enterprisespublic enterprises

Failure to implement strong bankruptcy Failure to implement strong bankruptcy lawslaws

Failure to reform labour lawsFailure to reform labour laws

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The grip of organised labourThe grip of organised labour Rigid labour laws have long been identified Rigid labour laws have long been identified

as obstacles to growth and equityas obstacles to growth and equity Probably the most highly protective of Probably the most highly protective of

labour interests in the world. labour interests in the world. There is practically no link between output There is practically no link between output

and remuneration - hiring and firing are and remuneration - hiring and firing are highly restricted. highly restricted.

It is extremely difficult to maintain an It is extremely difficult to maintain an economic level of productivity or improve economic level of productivity or improve productivity. productivity.

The present form of protection of organized The present form of protection of organized labour constitutes about 5-6% of the whole labour constitutes about 5-6% of the whole populationpopulation

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The grip of organised labourThe grip of organised labour This tiny labour aristocracy is employed in the This tiny labour aristocracy is employed in the

public and organized private sectors. public and organized private sectors. They do not represent the interests of the They do not represent the interests of the

overwhelming majority of India’s workers, who are overwhelming majority of India’s workers, who are either self-employed or work as casual laboureither self-employed or work as casual labour

They do not enjoy job protection or any other They do not enjoy job protection or any other benefits conferred on the aristocracy by the labour benefits conferred on the aristocracy by the labour laws. laws.

The aristocracy also consists of members of one or The aristocracy also consists of members of one or the other of the labour unions affiliated with ruling the other of the labour unions affiliated with ruling and opposition political parties. and opposition political parties.

Labour unions has been particularly effective in Labour unions has been particularly effective in preventing privatization of public sector preventing privatization of public sector enterprisesenterprises

Some privatised companies have no social utility Some privatised companies have no social utility value (eg hotels, airlines)value (eg hotels, airlines)

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India’s problem is India’s problem is bureaucracy, not bureaucracy, not

democracy democracy The combination of The combination of Vested interestsVested interests Continued reliance on belief in Continued reliance on belief in

industrialisation as key to poverty industrialisation as key to poverty andand

The need to retain protectionist The need to retain protectionist measures to sustain industrialisationmeasures to sustain industrialisation

Leads to slowdown in growth and Leads to slowdown in growth and developmentdevelopment

2020

Evidence againstEvidence against

Improvement in poverty since Improvement in poverty since 1991 start of reform1991 start of reform

No matter what the data source, No matter what the data source, survey or national accounts, survey or national accounts, growth is shown to lead to growth is shown to lead to poverty decline, almost one for poverty decline, almost one for one one

No growth, no poverty reduction No growth, no poverty reduction is the only conclusion is the only conclusion

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WTO and the end of WTO and the end of protectionism?protectionism?

As signatory to Uruguay Round agreement As signatory to Uruguay Round agreement 19941994

India has removed quantitative restrictions India has removed quantitative restrictions on imports of agricultural commodities and on imports of agricultural commodities and consumer goodsconsumer goods

But replaced with high tariffsBut replaced with high tariffs Has stated will use all steps available under Has stated will use all steps available under

WTO rules to protect economy from importsWTO rules to protect economy from imports Is 4Is 4thth largest user of antidumping largest user of antidumping

regulationsregulations Is most protected economy in AsiaIs most protected economy in Asia

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Economic ConclusionEconomic Conclusion Despite a range of impedimentsDespite a range of impediments There is slow reformThere is slow reform Reform positively assists poverty Reform positively assists poverty

reduction through growthreduction through growth To sustain growth further To sustain growth further

liberalisation of all economic aspects liberalisation of all economic aspects must continuemust continue

Merrill Lynch believes that GDP will Merrill Lynch believes that GDP will grow by an average of 8.5% a year in grow by an average of 8.5% a year in 2005, 2006 and 2007, 2005, 2006 and 2007, buoyed by rises buoyed by rises in foreign investmentin foreign investment

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Entrepreneur effectsEntrepreneur effects

Need to stimulate small businessNeed to stimulate small business More acute access to fundsMore acute access to funds Higher investment in education at low Higher investment in education at low

endend Development of labour intensive Development of labour intensive

export potentialexport potential Skewed to hi-tech without much Skewed to hi-tech without much

positive export successpositive export success Foreign business opportunities in Foreign business opportunities in

privatisation of infrastructuresprivatisation of infrastructures

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Prahalad’s imperatives for Prahalad’s imperatives for managementmanagement

India has hardly felt the impact of SE India has hardly felt the impact of SE Asian crisis. Asian crisis.

While many think it is good news, While many think it is good news, actually it is not. actually it is not.

It means that after five years of It means that after five years of active liberalization, India is still not active liberalization, India is still not part of the global economy. part of the global economy.

It is at best a marginal, global player. It is at best a marginal, global player.

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Prahalad’s imperatives for Prahalad’s imperatives for management – The New Economymanagement – The New Economy

Deregulation & PrivatisationDeregulation & Privatisation GlobalisationGlobalisation Open StandardsOpen Standards DigitalisationDigitalisation VolatilityVolatility Focused CompetitorsFocused Competitors Eco sensitivityEco sensitivity Transparency & AccountabilityTransparency & Accountability

– Indian managers must come to terms with the fact Indian managers must come to terms with the fact that they represent about 20% of humanity and that they represent about 20% of humanity and that they should have a say in how the global that they should have a say in how the global economy evolveseconomy evolves

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Practical level pragmatism - Practical level pragmatism - management practicemanagement practice

Gopalan & Stahl (2001)Gopalan & Stahl (2001) Argue for cross-vergence – hybrid combination of Argue for cross-vergence – hybrid combination of

domestic & imported conceptsdomestic & imported concepts– Widespread usage of EnglishWidespread usage of English– Familiarity with western educationFamiliarity with western education– Urban access to internetUrban access to internet

Lead Indian management thinking to a point where Lead Indian management thinking to a point where – Some ideologies equate to western practice (ie reject Some ideologies equate to western practice (ie reject

Indian national cultural values)Indian national cultural values)– Others reflect national cultural valuesOthers reflect national cultural values

= combination of indigenous & imported approaches = combination of indigenous & imported approaches to managing people at workto managing people at work

suggest eg – Loyalty will be strongsuggest eg – Loyalty will be strong preferential hiring of family members will be weakpreferential hiring of family members will be weak

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Business performanceBusiness performance Rajpal & Sagar (2003) identify that Rajpal & Sagar (2003) identify that

performance of Indian business is good at performance of Indian business is good at MNC level but problems emerge lower downMNC level but problems emerge lower down

They suggest local businesses are in need They suggest local businesses are in need of radical improvement if they are to meet of radical improvement if they are to meet global challenges (Chinese)global challenges (Chinese)

Need to develop key traitsNeed to develop key traits Having key customer insightsHaving key customer insights Focusing business strategies on customer Focusing business strategies on customer

valuevalue Quality commitmentQuality commitment Upgrading knowledge & processesUpgrading knowledge & processes Management by facts & feedbackManagement by facts & feedback

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The key of privatisationThe key of privatisation Gupta (2005)Gupta (2005) Most privatization programs begin with a period Most privatization programs begin with a period

of partial privatization in whichof partial privatization in which only non-controlling shares of firms are sold on only non-controlling shares of firms are sold on

the stock market. the stock market. Since management control is not transferred to Since management control is not transferred to

private owners it is widely contended that partial private owners it is widely contended that partial privatization has little impact. privatization has little impact.

This perspective ignores the role that the stock This perspective ignores the role that the stock market can play in monitoring and rewarding market can play in monitoring and rewarding managerial performance even when the managerial performance even when the government remains the controlling owner. government remains the controlling owner.

Using data on Indian state-owned enterprises we Using data on Indian state-owned enterprises we find that partial privatization has a positive find that partial privatization has a positive impact on profitability, productivity, and impact on profitability, productivity, and investment.investment.