Wednesday, June 27, 2007

Quest for Unsurvival

The devil lies in the details. Practicality lies in facts and figures. Poets and philosophers talk in the clouds. Much against my poetic instincts and alluding to the skills I learnt during my recent MBA, I present some hard facts of the serious crisis looming over India, before taking up a philosophical flight of fancy to raise the hopes, as is my wont.

· The distance between Mumbai’s international airport to the heart of India’s financial capital may be only 30 kilometres, but getting there can take more than two hours in the rush hour.

· World’s average speed is 50 kms per hour, the traffic on Indian roads trudge at 25 kms per hour.

· Last year, India spent $28 billion, or 3.6 percent of GDP, on infrastructure; China, in comparison, spent $201 billion, or nine percent of GDP, as per a report by JP Morgan Stanley.

· Montek Singh Ahluwalia, of India’s Planning Commission, told the recent annual meeting of the Asian Development Bank that India must spend an additional 2.5 to 3 percent of GDP annually on infrastructure if it is to sustain economic growth of 8 to 9 percent.

· Mckenzie report states that India leads the market in offshored back-office services, but as a manufacturing center it lags behind China, Thailand, and the rest of Asia. The reasons are well documented: multinational companies operating in India must overcome erratic electricity supplies, poor roads, and gridlocked seaports and airports while contending with government policies that discourage hiring and hold back domestic demand for goods in many sectors.

· Interest payments and subsidies, which together account for 27 per cent of government spending, starve the country of much-needed resources to invest in physical infrastructure, such as roads and power stations.

· India's retail promise must seem tempting, but that outlook "is tempered by the fact that the country is grappling with severe infrastructure and policy issues," says the CII in the report it produced with A. T. Kearney. "Cold chains [distribution chains for perishable items], warehousing and logistics infrastructure will fast become unmanageable challenges for India if proactive action is not taken."

· A
Financial times report on India’s 2007 march budget says that the budget, as widely predicted, avoided any mention of the politically sensitive reforms that economists say are essential to sustain 8 per cent-plus growth in a stable inflationary environment.

· The government has set aside $30bn for infrastructure development next year. “We have to think on a different scale and these kinds of miserable amounts are not going to help,” said Nasser Munjee, chairman of Development Credit Bank. “We are going to have to spend something like $150bn a year if we are going to catch up with what the economy really needs,” he said, accusing the government of failing to formulate a strategy to attract private investment in infrastructure.

A trip down the memory lane is not uncalled for. India received ‘political’ freedom from the British in 1947 but it had to wait for ‘economic’ freedom until 1991. Nehruvian socialism had strangulated India’s business and hence the economy from blossoming. Draconian laws that placed businessmen next only to traitors ruled the roost and prevented businessmen from boosting the economy through their entrepreneurial skills. Thanks to IMF’s threat of ‘reform or perish’, Narasimha Rao’s Congress government was forced to open up.

Gradually thereafter, all the reformed sectors faced international competition and evolved. The IT boom was also a fallout of these reforms.

Let us associate the impact of reforms on some industries and see how the forces of these industries have interacted to bring the scenario where we are now. Take automobile industry for instance. How many people in India owned a car – which meant an Ambassador or a Premier Padmini – before the reforms began? Trade barriers and insane import duties made foreign cars beyond the reach of an average Indian. Meager salary levels ensure that only the top government officials and businessmen had cars at their disposal. Ergo, only a tiny fraction of the society had cars. Consequently, a car was a dream that every bourgeois Indian wanted to own.

Come reforms and the Indian government opened up thirty four industries including banking, automobiles and IT. A plethora of companies then set up base in India. Banking and IT opened up new job opportunities and paid the Indians hitherto unheard of salaries. Living standards started improving along with the spending potential of the emerging middle class. More and more banks started offering various loans for everything that the new Indian customer could or couldn’t buy. Foreign cars slowly started flooding the Indian market. The dream of owning a car was no longer a dream, thanks to higher salary levels and easily available bank loans. Indian cities now saw more cars per capita running on the roads which were not modernized at the same pace. Corruption in issuing driving licenses saw people shifting from two-wheelers to cars without their rash driving habits chastened. The result: roads became more congested and accident prone with greater damage per accident. Random, corrupt and unplanned licensing for retails saw shopping complexes and modern malls come up without proper parking facilities. While retail sector boomed, traffic situation worsened. Almost all Indian cities are plagued with traffic problems. Even more so are the IT hubs. Bangalore needs a special mention here. The city has already reached a point where traffic snarls are eating into social life and spiking attrition. How long can people survive in a city that provides lifestyle but not life? How long can you survive in a city where driving two kilometers in potholed and congested roads take you 45 mins? If Indian cities were balloons, they would’ve burst by now.

The reforms in real estate meant the best of the living infrastructure being made available to the nouveau riche Indian customer. Every such luxurious apartment consumed more power. To lure IT companies, states gave them guarantees of uninterrupted power supply at the cost of some other sectors. At the same time, a bungled power reform saw states distributing power for free for silly political gains. Inefficient distribution and collection systems saw power theft as a rampant problem which drained the power sectors’ profitability. Consequently, India is suffering from a tremendous power crisis.

India lacks a holistic view on reforms. While reforms are good, the spiraling effect of skewed reforms is what India is experiencing now. Indian government patronized IT companies. Gave them tax breaks and uninterrupted power supplies but ignored the infrastructure that is so important to accommodate the influx in cities generated by rapid job creation. While rising incomes made cars within their reach, bad roads and traffic ensured consumers were left huffing and puffing by the time they reached the malls. India is offering great ‘lifestyle’ in pockets. But its skewed policies and misalignment of holistic reforms threaten to take ‘life’ away from this ‘style.’

Tata Motors is scheduled to launch the cheapest car in the world at rupees one lakh. While it is a great engineering feat, I seriously doubt if India – inspite of the existing demand for such cars – is ready for such a development. With Banks ready to offer credit at the drop of a hat, Indian lower middle class would lap it up. But imagine the traffic disaster it would bring upon the cities. The per capita space occupied on roads would increase drastically and worsen an already crisis ridden scenario. The flanking services(driving licenses, roads, driving habits) that support such industries need serious reforms before any such move would see the benefits it is envisaged to bring in.

So where lies the solution to this? The answer to this is extremely difficult and yet a no-brainer. We need a hard task master who can enforce the execution of tougher policies than cave in to political pressures. We need urgent reforms in the ‘relegate’ sectors (power, infrastructure) so they can support the already reformed sectors (IT, Banking) efficiently and help them grow at the scorching pace they’ve gotten used to.

Can India achieve it? The odds against us are high. But so were the odds against India when, during Independence, nobody gave it a chance of survival based on its utopian religious policies. The skeptics gave Pakistan a thumbs up for the world have never until then seen how various religions could inhabit a place in peaceful coexistence. India has successfully made those skeptics eat their own words now. One hopes, that the resilience of Indians would help it perform an encore.