Looking Inward

The dimly lit corridor of ‘The Mariott’ played a soothing effect on my eyes as I entered it to reach the café at the far end. I had travelled quite a distance to reach for this meeting with Bob, CEO of a leading Texas based IT consulting firm.

Bob had given me a heads-up on his plans to expand his reach in India and wanted to have a dialog covering all aspects of his plans and my possible role in helping him in those.

It is common knowledge today that the world’s senior executives are making rapid plans of investing in India for fear of missing out on one of the great growth stories and opportunities. Like all; Bob had several questions playing on his mind and he sought to get some views from me.

India posed a complex picture to him – growing economy, stable democracy, undercurrent of religious and ethnic tensions, bustling high-tech centers with equal presence of slums, governance issues etc. My dialog with him allowed me to pen down some key issues which haunt people like Bob today.

(1) Will democracy ensure continuance of economic reforms in the same direction?

India’s democracy and the status of its coalition politics is considered as extremely ‘noisy’. Different political parties use their media strength to announce their growth reform directions and they are ‘noisily’ critical of their opponent’s directions. Despite the fact that India has moved unwaveringly in the direction of reforms, the political outbursts in different directions do confuse the multinational investors.

(2) Why is the pace of reforms so slow?

Multinationals complain that little has been done to cut the budget deficit (8 to 9 percent of GDP), to relieve the problems of India’s poorest people, or to embark on new reform programs.

India’s coalition politics pose more problems. The Communist Party, whose support props up the governing coalition, has blocked privatization and efforts to remove the restrictive labor laws for special economic zones. An economic growth of 8 to 10 percent is needed to arrest increasing unemployment. State governments, which hold considerable power in India’s decentralized democracy, further, slow the pace of reform. Only progressive state governments undertake reforms and solicit foreign investment more actively than others. Hence growth is in pockets and not uniformly.

(3) Why not invite multinationals more freely?

Foreign direct investment though increasing since the start of the reforms, are nowhere comparable with the amount that China attracts. In the past fiscal year, it was less than 10% of China’s $60 billion. The complex central and state regulations actually hinder the investment strategies. Foreign companies find acquisitions harder to make in India than in most other emerging markets. Though the investment restrictions are falling in most sectors, lot more needs to be done especially in the areas like regulations on foreign ownership, labor laws etc. Starting a business in India takes 89 days, on average-more than twice as long as in China. Closing a business is just as difficult.

The World Bank estimates that Indian senior managers spend about 14 percent of their time dealing with regulatory issues (compared with about 8 percent for their Chinese counterparts). Such issues are deterrents to new investors.

(4) What other factors do I need to analyze in my decision to invest in India?

While India’s consumer demand is currently growing three to five times faster than the overall economy, China’s economy is in a later phase. Companies that enter India now can consolidate faster and make it almost impossible (and very expensive) for latecomers to duplicate. Not investing in India now can increase their cost of entry tenfold just a few years down the line. Companies have learnt the harder way from their China experience.

But India isn’t a place for anyone hoping to make a quick rupee. Organizations need staying power and investment. Strategically, India gives two advantages – diversified supply chains, particularly in manufactured goods and textiles and richer technical talent.

(5) Is offshoring to India worth the political risk?

Offshoring has become a volatile issue in Europe and the United States where the economy in recent months have been sluggish with rise in unemployment. The debate is intensifying and this has created a higher awareness of the advantages of offshoring, particularly for small and midsize businesses.

Politicians in the developed world are passing protectionist legislation, the long-term impact of which is not so good on companies that are seeking to cut their costs. But experts have convincing arguments to justify more value from offshoring.

The offshoring sector is evolving from a cost-sensitive framework to value-addition framework. This has generated more and more demand for skilled workers pushing salaries higher and triggering a talent war making innovation mandatory for survival.

(6) Will infrastructure be a problem?

For years, the government neglected India’s weak infrastructure, and the costs of that neglect are now obvious. The lack of reliable, reasonably priced power is the single largest constraint on the country’s businesses besides other issues like transportation, roads, airports etc.

Even in the rosiest scenario, India’s infrastructure problems will take several years to resolve. Inadequate power, ports, and roads are especially troublesome because they raise energy- and logistics-related costs-for example, by forcing businesses to keep higher-than-optimal inventories and to buy stand-alone power generators. As the situation improves, these costs will slowly fall.

(7) Will India protect my intellectual property?

Earlier this year, Indian parliament approved a new patent protection law that prohibits Indian companies from copying the products of other companies. This legislation-a response to pressure from the World Trade Organization-has raised confidence that intellectual property will receive protection. For example, Harry Potter and the Half-Blood Prince, helped by an unprecedented push on the part of its publisher, sold close to a quarter of a million legitimate copies in the country on the first day of its release-20 times more than any other book ever had. With new protection in place, business volumes and investments in different domains is expected to surge. But till very recently, the question on IPR had shied away investor vary of losing their hold on their products.

Bob had many more questions, but my dialog with him had underlined the fact that successful foreign companies in India shared three characteristics. First, they invested for the long term and made a strong organizational commitment by assigning senior managers to work with established local teams. Second, they adapted their businesses to local conditions rather than forcing foreign models on India. Finally, they helped to create and shape a newer market where volume of the market determined the shape, size and price of the product.

Bob was clear that he had no choice but to invest and expand here fast. He only wished that our pace of reforms were faster!