India: The Other Tiger

Source: Exec Digital UK

Date :14/11/2007 17:00:34

India is rising to economically rival China as a destination for inward investment, outsourcing and as a market in its own right. ExecUK investigates

By Ruari McCallion

‘The Hitchhiker’s Guide to the Galaxy’ began with an observation about the Universe: that it is really big. That blinding glimpse of the fatuously obvious makes a kind of point that’s relevant to India, too. The distances are vast, the changes dramatic, the contrasts are deep. The offshore energy fields of the south-east, off Tamil Nadu, and those off Gujarat and Mumbai differ from each other and are a world away from the tea plantations of the north. The chaos and bustle of Delhi and Calcutta contrast with the relative tranquillity of Goa. To talk of ‘India’ as a single entity with a unified range of opportunity is to misunderstand the country.

India is a democracy. China, its neighbour and economic rival, has centralised control over its economy and things happen because the Party wants it to. In India, everyone who has a voice uses it: agreement is necessary before progress happens. That potential weakness – the disparity, argument and need for consensus – can also be a strength. One person who has experienced this is Robert Berkeley, managing director of Express KCS, which provides outsourcing services to publishing houses in the UK, the US and other, primarily English-speaking markets.

“When you land at Beijing, it feels like a western airport. It’s quiet and your progress is smooth. Land at Delhi and you emerge into chaos,” he said. “It’s free-flowing. People leap into any holes they spot and start selling. Delhi airport reflects that [vibrant] culture. If you look, any centralised economic management system will ultimately fail. It can’t govern effectively because it can’t know everything. The Soviet Union tried and failed.”

The chaos that confronts the newcomer into Delhi, Calcutta or anywhere else in India is, then, a manifestation of opportunity. The same could be said of the poor power supplies and inadequate physical infrastructure but one could be forgiven for wishing for a degree of control, so that at least the lights would stay on without recourse to back-up generators and their expensive diesel fuel. Change is happening in India although not as fast as in China – it started later, has progressed more slowly but it’s increasing in pace.

There were false starts and attempts at reform going back decades; some more successful than others. The country can now feed itself, for example. While poverty and hunger persist, the last great Indian famine was in 1967.

Institutions and infrastructure

Economic reform began to look promising in 1980, when Mrs Gandhi made clear her desire to tap into the huge potential represented by NRIs – non-resident investors, Indians and those of Indian descent resident overseas. Restrictions on non-residents investing in private Indian companies had, till then, been total: it simply wasn’t allowed. The potential was enormous: NRIs’ accumulated savings amount to something over $700 billion. But the process was not smooth. When active outside investors came along, the established families, which had run things pretty much their own way for ages, didn’t like it at all. The issue came to a head when Swraj Paul, now Lord Paul of Marylebone, tried to acquire large holdings in two companies, named DCM and Escorts. Paul ultimately lost his battle but the tide of the war turned. In their attempts to resist him, the two companies sought to issue massive numbers of new shares. That would dilute not only Paul’s shareholding but also that of the institutions – banks, insurance companies and finance houses, and the days of the old ways were numbered. The legal system is an essential part of the progress.

“A country is nothing without entrenched institutions,” said Berkeley. “There has been a legacy of the ‘Licence Raj’: to get anything done, you need a licence. To get a licence, you need civil servants. The opportunities for corruption are immense.” The cure? Abolish the need for licences – even for something as simple as passports – and the opportunities for corruption diminish. This happened in the early 1990s. As the courts uphold the law, palm-greasing is attacked at the root. “Buildings had been put up in Delhi with no planning permission; they were unsafe and illegal. Now, the owners have been invited to get proper planning permission and, if they don’t bother, their buildings are flattened. My favourite coffee shop in Delhi disappeared between one visit and the next – it was in a building without planning permission, the owners hadn’t acted to get it, and the place had been flattened. The legal system looks a lot like that in Britain but it is still very slow – but it, and the other institutions are being seen to act.”

As the institutions strengthen, financial openness improves and the infrastructure is developed, confidence rises in a virtuous circle. Compass BPO provides outsourced back-office services to corporations all over the world and expects to continue.

“Outsource companies will continue to thrive so long as they show they add value rather than being simply there for cost arbitrage. Higher skilled activities will help this – that's what we do,” said director Mark Atkins. “The Indian economy provides many challenges, including government control, paperwork, corruption and foreign exchange. But the retention of talent is the most critical for outsourcing organisations.” On that subject, there have been reports of personnel shortages in India’s booming IT industry, which Berkeley seeks to put in perspective.

“There is no shortage of people as such,” he said.” They go to California or wherever but, like any expatriate, ultimately they want to go home. The lifestyle and environment is very attractive. Indian companies grab them with enthusiasm: they inject a degree of Western culture and work ethic, and provide extra value.” Outsourcing is still strong – KCS is growing faster than it anticipated and it has access to a huge pool of skilled labour. India is producing millions of graduates each year. Companies like Microsoft and international consultancies like Accenture are recruiting thousands. But India is a producer and a market, too: Lord Paul’s Caparo and his Indian family company, Apeejay, are genuine international powerhouses in steel and manufactured goods and they produce for India, as well the world market. Tata Group had revenues of $21.9 billion in 2005-6, across its 98 operating companies. The City Rover it supplied to the now-defunct MG Rover Group is in the past: its latest models are approaching European standards.

Getting involved

What is the best way to get involved with the growing Indian economy, which Berkeley describes as barely being at the hockey-stick stage, as yet? Joint ventures (JVs) have been described as the route forward – they bring in a knowledgeable local partner, who may be able to smooth the route to progress. They can give access to established and growing markets and they have been the law. But they are a long way from being plain sailing.

According to a connection with PricewaterhouseCooper, JVs have to be approached with care. There have been too many incidents of intellectual property (IP) being used without any concern for ownership or confidentiality. Inward investors have found themselves at the mercy of their so-called Indian partners, and discovered late in the day that their JV is being loaded with expenses from partners’ other interests and even that the company is being used for activities completely unconnected with the supposed joint project. Local JV partners have been running their own agenda, which has been about grabbing IP and doing something else with it.

“JVs are difficult even if both parties come from the same background and culture,” said Atkins. “JV's in Asia have the added dimension of cultural differences which can easily cloak ‘ulterior motives’. If you start off by suspecting your JV partner is a thief then that's not good. It's all about relationships and understanding why there is a JV in the first place. Previously India insisted that certain activities were JV's rather than allow 100 percent foreign owned companies. This simply forced people in JV's where there was no commercial logic for one - hence the bad reputation.”

Those seeking to overcome difficulties by achieving low-cost sourcing from India really should think again: it’s a one-hit wonder and the challenges may outweigh the benefits: it’s better to improve the business in the domestic market before looking for magic wands elsewhere. Investing overseas should be done with caution and anyone who doesn’t enrol local help and intelligence probably deserves everything that will come their way. This article opened with the observation that India is a very big place, with different experiences, depending on where you are. It’s a huge opportunity – a sleeping giant that’s only just waking up, having a stretch and realising that it’s strong. The opportunities are there, the economy is growing rapidly, the infrastructure – physical, political and institutional – is improving. And it’s a democracy.

“I definitely prefer India, from many points of view,” said Berkeley. “Everyone speaks English, at least as a second language; there’s a cultural understanding; and I have more confidence in a democracy.”