Several economic indicators are turning red for India. Instead of the predicted double digits, GDP growth is expected to languish in the 5-6% range in the present and coming years. The rupee is at a life time low and the stock market is the worst performing index among developing nations. Several factors are blame, including high interest rates (which are necessary to control runaway inflation of 9-10%) and a governance deficit (no major economic reforms have been passed in the past 6 years).
Other underlying structural problems in the economy include a banking system crippled by bad debts, and stubborn current account, trade and fiscal deficits.
India’s economy can seem like a bicycle—it needs to keep moving fast to be stable. Once conviction in the destination falters, companies curb investment and hope turns to fear that the country’s problems may be intractable.
It seems that inflation is the root cause of several of these problems – much of food inflation is caused by the country’s creaking infrastructure that leads to severe waste and fluctuations in commodity and food prices. This puts the recent reversal of a decision to allow international organized retail players into India, into greater focus. Scholars have long argued that FDI in the retail sector will help develop the necessary supply chains and cold storage infrastructure that a 21st century economy needs. It will also help to drive down food prices, benefiting consumers and the country’s growth prospects in the long run.
Read more at India’s economy: Slip-sliding away | The Economist.
- Need innovative remedies to fight slowdown, inflation: Pranab (thehindu.com)
- High inflation, slowdown in decision-making affect growth: Kaushik Basu (thehindu.com)
- India’s worst-case scenario now a reality (business.financialpost.com)
- India not Incredible Anymore? (ibtimes.com)
Gartner’s latest report has some other interesting facts:
- Nokia still leads the field, but Samsung is catching up fast (24% vs 18% of market share)
- Smartphone sales reached 115 million, representing 26% of the mobile device market
- Android was on 53% of all shipped smartphones
- Q3 smartphone stats now available, Symbian slipping, but still ahead of iOS (allaboutsymbian.com)
- Android snaps up 52% of mobile phone market (techradar.com)
- Android Crushed the Smartphone Competition Last Quarter – Wired News (wired.com)
The Economist‘s special report on India Inc. states that unlike in western economies, successful Indian firms are predominantly government owned or family owned businesses. The conglomerate is the business model of choice and this empire building is reflective of the 1900′s economic landscape of the US. An Infosys is an exception, rather than the norm.
All this might seem a recipe for disaster. In Korea and Japan closely held and widely spread firms became slothful. So far India Inc has been different: its big business houses compete and innovate fiercely. Their returns on capital are neither pathetic nor outrageous and most are prepared to invest billions of dollars in the risky capital projects that India needs so badly.
In the past decade Indian business has not been on a journey towards someone else’s economic model, whether Chinese, European or American. It has not been growing out of an immature phase, or shaking off a simpler way of doing things. Instead it seems to have established its own equilibrium—what might be called “capindialism”—in which profits are controlled not by institutional shareholders but mainly by the state, or by entrepreneurs and their descendants. Outside the state firms, the fiddly conglomerate is the favoured form of organisation.
The special report blames India’s soft state for being the reason firms choose to grow into conglomerate structures. It claims that ‘horizontal and vertical diversification’ of professionally managed firms is proof of this thesis.
Yet the best explanation is India’s soft state. Courts can take years to make their minds up, so contracts are hard to enforce. Infrastructure is often poor, supply chains tricky, red tape a hazard, and markets for people, materials and finished goods unreliable. Tarun Khanna and Krishna Palepu of Harvard Business School coined this idea in a 1997 paper. In these circumstances it makes sense to do things yourself.
This cause and effect reasoning seems to be rather simplistic for the complicated Indian Thali . It ignores the unique role of the joint family in Indian society. It also ignores cultural and legal norms that encourage dynastic progression of company ownership and wealth. This ownership structure also promotes a more long-term view by Indian business houses. Unlike institutionalized firms, where bosses have to meet quarter to quarter performance measures, family owned businesses are more focused on creating wealth in the long-term, for the next generation. Thus they invest in frugal products (which, according to the report, do not generate high profits), which is a means to hook the millions of potential middle-class customers of tomorrow.
Overall, though the analysis comes across at times as bit contrived (it works towards the underlying assumption that one size fits all – the institutionalized business models that are successful in the west are the best) and at other times a bit naïve (for example, the report mixes up vertical integration, related diversification and unrelated diversification), the report is well written and worth a read. It raises several key questions and invigorates critical thinking on the state of India’s economic landscape.
If India is to finish the long journey to superpower status that has been plotted for it by many forecasters, it will have to get its act together on things like infrastructure, efficient land allocation, education, bond markets, reliable supply chains and the enforcement of contracts. Yet if it manages to make progress in these areas, the rationale for sprawling big business groups—sometimes almost like mini-states in their own right, as substitutes for the real thing—will gradually disappear. A big danger, then, to Indian business’s current way of doing things is long-term economic success. It would make today’s approach to organising firms redundant.
Read more at Business in India: Building India Inc | The Economist, Adventures in capitalism | The Economist, Family firms: The Bollygarchs’ magic mix | The Economist, and The Indian miracle and the future: Rolls-Royces and pot-holes | The Economist.
The Economist reports that as a percentage of GDP, India’s exports of goods and services have increased from 12% to nearly 25% over the past decade. However, this does not tell the full story. A quick look at the numbers shared by India’s Department of Commerce shows that India’s trade deficit has grown in sync with the increasing exports.
Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
India’s Trade Balance -59,321.19 -88,521.83 -118,400.95 -109,621.45 -118,633.24
in million USD
- IT hiring in India reflects strong future growth (abhishekkathuria.wordpress.com)
More people work in call centers in the Philippines than in India. The growth rate of India’s call center industry has slowed as it faces demand and supply side pressures. Many clients are moving work back onshore, operating costs are increasing and the jobs are loosing their luster.
India now faces stiff competition from the Philippines, according to recent research from IBM. The study for the Contact Center Association of the Philippines estimates that 350,000 Filipinos work in call centres, compared with 330,000 Indians.
- Manilla calling (bbc.co.uk)
Indian IT companies are delaying joining dates of new hires. This may reflect an expected slowdown in demand for IT services in mature markets. It may also have something to do with the double digit salary growth witnessed in this sector, which is reflected in lesser attrition – attrition is down from 25% to 15%.
However, this is not dampening the current hiring spree, which reflects an expected uptick in demand for IT services within the next 1.5 – 2 years.
The Economist has shared a great interactive chart using which one can predict when the Chinese economy will overtake the US. As per the IMF, this will occur in 2016 on purchasing power parity basis. Using the relative growth rates of the two economies, the difference in inflation (the GDP deflator) and the appreciation of the Yuan against the dollar, the Economist’s tool gives a target of 2018.
Read more at Becoming number one | The Economist.
The interactive chart is at
IT companies are hiring heavily at engineering campuses across India, with many students receiving multiple offers.
Take the case of Amrita University which has campuses in Bangalore, Coimbatore and Kochi. India’s second largest IT exporter Infosys and Nasdaq-listed Cognizant shared the first slot. While Cognizant picked up 1,263 students, Infosys went for 1,255. Around 970 students had common offers and finally, 83% of them opted for Cognizant while the remaining chose to go with Infosys.
However, this does not tell the full story. Students who receive an offer today will likely join jobs after another year. After joining the job, most fresh engineers receive 3-6 months of training before they join projects. Thus the hiring of today reflects the projected demand for IT services, 1.5 -2 years into the future.
During 2011, over 4.3 lakh fresh engineering graduates are expected to pass out with 2.5 lakh will be graduates with an IT degree, says industry lobby Nasscom. However, not all of them are directly employable and hence the huge scramble for talent at top colleges. Companies know this and are making a beeline for the top-level talent.
A mutually beneficial situation – the largest employer in the UK, Tata brings animal spirits and resources to the seemingly moribund British manufacturing industry. Tata gains not only 60% of revenues, but also from improved management processes, advanced technology and access to the international stage.
Tata UK is now the country’s biggest manufacturer, with almost 40,000 workers—just ahead of British Aerospace. Add in Tata’s service industries, such as consultancy, and the payroll tops 45,000 (see chart). Its presence in Britain is part of a growing trend. Britain is second only to America as a destination for investment by emerging-market firms, many of them from India.
But just how sweet is Tata for Britain? Any fears that Tata would strip out technology and ship it home have proved baseless. The headquarters of Tata’s beverage business is Uxbridge, a London suburb, not India. Resources have been poured into other businesses.
- How India ‘Colonized’ Britain (time.com)