Corporate Sheen On The Shine

Updated: Mar 25 2004, 05:30am hrs
Discussions and debates on whether or not the economy is shining are being conducted at three levels. First, are the figures trotted out by the warring parties real Second, if they are, are they sustainable Third, do the growth figures have any significance for large areas of the economy (agriculture), or for large sectors of the Indian society (the 26 per cent below-poverty line) Each question has great relevance to the debate.

It is surprising that the debate is largely conducted in quantitative terms since the record of the NDA government does not, in quantitative terms, reveal anything spectacular. The annual rate of growth in GDP at 5.6 per cent is certainly not bad, but not a figure to call for three cheers. In agriculture, in three out of the five years, the rates of growth were virtually negative. In industry, for three-and-a-half out of the five years, there was the impact of the recession, aided by penalties of restructuring. It is the service sector that carried the day for the Indian economy.

Policy-wise, the first two years of NDA rule were marked by confusion and a vague proclamation of swadeshi battle cries. It is the last two years that saw the emergence of the dynamic effect of a number of policy decisions. This can be compared to the first three years of Manmohaneconomics during the 90s. In the first three years of reforms, Manmohan Singh prised open the economy; in the last three years, the NDA policies have given it a creative push the dismantling of quantitative restrictions on imports, the opening up to foreign investment, the dismantling of administered pricing, the stress on implementing privatisation and the thrust in the infrastructure sector as evinced by the Golden Quadrilateral.

What makes for the shining economy is not the quantitative but the qualitative performance of the economy, particularly in the industrial sector. One can argue that India Inc., both public and private, has played a major role in creating the feel good factor, and to this extent the Indian corporate sector is not only a major beneficiary of the feel good factor but a major contributor to it.

To go back to the qualitative thesis, the industrial production series, based on 1993-94=100, does accommodate and reflect structural changes by altering the relevant weightages, but it does not and cannot take into account the improvement that has taken place in the quality of most Indian products, especially during the last four years. To illustrate, the production of cars in 1991-92 was around 160,000; today, it is nearing 900,000. Over a 15-year period, this five-fold growth is worthy of note, but the more important point to stress is that the overwhelming majority of the cars now produced in India are of international quality.

As regards the BSE Sensex, there is at least the consolation that the 30 scrips of today are not the 30 scrips of 1991-92. Twelve scrips have been dropped and scrips of 12 new companies have come in. Needless to say, the software, telecom and the pharma sectors have been the manifestations of the structural changes in the economy; and so reflected in the composition of the latest BSE Sensex.

Anyone associated with Indias industrial growth during the last 15 years will testify that Indian industry of 2003-04 is not the industry of 1991-92. The improvement seen in the products manufactured by Indian industry and the introduction of new products, shows the clear emergence of a new industrial economy. More significantly, there has been a remarkable change in the mindset of the top management of industry. Company after company has gone in for substantial restructuring and reinventing. May be, it was not in spite of but because of the severity of the competition and the recession that Indian industry has been able to achieve a remarkable improvement in the quality of products and services. No doubt, quite a few companies have suffered the shocks of competition, as a result of which there have been mergers, divestitures and even extinction. But as of now, the great majority of the first 500 Indian companies have taken the blows and emerged a victor.

It is true that government policies, particularly in the last three years, have played an active role, directly or indirectly, but the essential credit for this transformation must go to Indian industry.

However, an investment-famine has afflicted Indias infrastructure sector and in the next two to three years the country may suffer its impact, particularly if the rate of growth of industrial production is stepped up. Likewise, the decrease in the labour force in industry, both in the public and private sectors, has resulted in jobless growth. Once again, this penalty has to be faced in bringing the productivity standards of industry up to global levels. Hence, perverse as it may sound, the jobless growth is actually an index of the sizeable leaps scored by most sections of industry.

Once again, the growth figures of industrial production alone cannot reveal the basic areas of strength. This is not to say that outside factors have not helped Indian industry; certainly, the sharp decline in interest cost has been a beneficial factor. Industry today operates at levels of inventories and labour force that are lower than before, and this is helped by a sharp reduction in the working capital. At the same time, the sharp reduction in the interest rate structures, too, has played a role.

This is not to say that Indian companies, including MNCs operating in India, have come up to global standards in productivity or in the economies of scale. The fact is that almost every Indian company nowadays plans its strategy, at both the local and global levels. We have the assurance of at least 10 major companies that, with their next tranche of investments, they will, by around 2006-07, reach global standards and scales.

It is not that Indian manufacturing industry has become a global low-cost sector; if that were so, it would not clamour for anti-dumping duties and high import tariffs. It is now accepted by Indian managements that restructuring will have to be a continuous process and will need to be supported by second generation reforms. And this will be a crucial test for the new government.

The writer is chairman, Siemens India Ltd.