India Is Living Up to Its Promise
The usual discordant noises are coming out of India. Investors are getting nervous about the impact of high-priced oil on the economy: The Bombay index is off 3% so far this year. The opposition is assailing the ruling BJP's budget for its attempt to rein in subsidies. Farmers are praying for a better monsoon. Poor rains last year kept GDP growth to 4.4%, well below archrival China's 7.8%.
Yet talk to managers in India's corporate sector, and you actually hear hope in their voices. Amit Kalyani, 27, chief technology officer of Bharat Forge and the grandson of the listed company's founder, says the company's main problem these days is "how to manage growth." The maker of car and truck components has just come out of a three-year restructuring that cut the workforce by 35% and tapped new technology to increase efficiency and launch new products. Sales, at $128 million, are up 12% from three years ago, profits are surging, and the company has paid off a big chunk of its debt. Today, Bharat Forge has cemented its position as one of the world's largest axle-component manufacturers, with a 50% market share in the U.S.
Is India the next growth story? It's hard to believe, given the many false dawns the country has seen. Inflexible labor laws, government red tape and venality, decrepit infrastructure and the special interests of the license Raj -- they're all still there, conspiring to thwart a real transformation of the economy. "The losers -- some of the protected businesses, politicians, and bureaucrats -- can still hold up the system and slow down progress," notes economist Surjit Bhalla, a government adviser who manages the New Delhi-based Oxus Fund.
But there are enough signs to fuel tempered optimism. Vivek Paul, vice-chairman of Wipro Ltd., one of India's top software companies, ticks off some of the reasons: lower tariffs that force local industries to be more competitive, deregulation that drives costs down, the rapid expansion of the service sector, and the effects of better education. "If you look at the macroeconomic pieces falling into place," says Paul, "you'd say India was getting ready for takeoff." Indeed, the economy is expected to grow a healthy 6% this year.
Paul thinks India should focus on service industries like software and technical support. Yet even in manufacturing, signs of excellence are emerging. This is surprising given the magnitude of the "China shock" -- the flood of cheap Chinese goods that hammered local Indian companies when tariff barriers came down. In response, however, Indian managers have refurbished factories, cut bloated workforces, and installed modern financial systems. Half a dozen investment-banking analysts have lately lauded India for its new manufacturing prowess.
One standout in the steel industry is Tata Steel, or Tisco. Once a global laggard, Tisco was motivated to reform in the early 1990s when India's economic liberalization and international free-trade agreements pushed tariffs on imported steel down from 80% to 25%. As a result, since 1995 Tisco has slashed its 78,000 workforce by half, spent $1.8 billion modernizing its plant, and moved into higher-value-added products such as steel used for cars. Productivity doubled, and exports, aided by firmer steel prices, have zoomed to $250 million, or 15% of production. Revenues are up from $1.55 billion in 1997-98 to an expected $1.88 billion this year. "We had to change or go under," says Tata Steel Director Ishaat Hussain.
The biggest obstacle in the way of making Indian industry competitive has for decades been the government -- with its complacency, corruption, and myriad rules and restrictions. Tata Steel, for instance, until recent years could not manufacture or export a single sheet of steel without government permission. Many industries' products had government-set prices, and the textile industry was decimated by rigid labor rules.
This time around, can Delhi actually make growth possible? It won't in the near future forsake subsidies, and the temptation to bail out key companies will remain strong. But some government-led actions are working. The turnaround at Bharat Forge, for instance, has been helped immensely by the opening of a new, eight-lane expressway between Bombay and Pune that has chopped in half the time it takes to get axles to the Bombay port for export. Delhi is also funding a $2 billion upgrade of its rail system, including construction of a new subway for the capital itself. The payoff in increased growth from all these projects could be huge.
Other investor-friendly policies have been helping. The key, says economist Bhalla, has been a big drop in corporate interest rates, to about 10%, making credit more affordable. And last November, a law was passed allowing banks to foreclose on companies that had stopped paying their debts, freeing resources for viable businesses. A day after the act was passed, ICICI Bank moved to attach the assets of Mardia Chemicals Ltd., which owed it $65 million. It was followed by dozens of other foreclosures. Now, says Deutsche Bank economist Sanjeev Sanyal, "India has one of the most stringent creditor rights in Asia, and banks will start lending to entrepreneurs again."
One important reason India's industry is more competitive is the rising level of education. According to a 2000 report by India's Planning Commission, Indians today have an average of five years more schooling than they did 20 years ago, with almost universal primary education and 80% of the population receiving some secondary schooling. Educated young Indians are landing jobs at such places as international call centers, whose workforce has risen from 12,000 to 54,000 in just three years. "With manufacturing and services expanding even in ru-ral areas, the opportunities for jobs beyond tilling the land are greater now," says Pronab Sen of the Planning Commission.
A crucial government program is the privatization of state-owned corporations and public facilities, a process that attracts new capital to businesses that desperately need new management. The current privatization minister, Arun Shourie, is admired for his probity, and he has a lot on his plate. This year, giant state-owned oil refiner Hindustan Petroleum will, at last, go on the block. Twenty-four of the country's 175 long-neglected ports are up for sale. Britain's P&O Group has already bought a container terminal and built a second. Airports are another priority. Tech centers such as Hyderabad and Bangalore will soon have new private airports, while the government is going to begin a massive upgrade of the New Delhi and Bombay international airports.
It's hardly guaranteed, of course, that all these ambitious programs will come off as planned. Battles over airport projects and privatization have raged in India for years. The vested interests have clout. But bit by bit India may get the growth story it deserves.
By Manjeet Kripalani in Bombay