By Subhash Sharma
Economists have a habit of measuring investment by how much money goes in. It is a poor habit. The more useful question, and the one policy rarely asks, is how long the money has to stay in before it produces anything. A software park pays back in three years. A pharmaceutical plant in five or six. A semiconductor fab, a shipyard or an aerospace supply chain can take a decade before the first rupee of return appears on anyone’s balance sheet. That difference in gestation, more than any difference in scale, is what separates the India of the last thirty years from the India now being built.
For most of those thirty years our comparative advantage lay in the short-gestation businesses. We wrote software for the world, made its generic medicines, ran its back offices. These were good businesses and they lifted millions of families into the middle class. But they also let us avoid a harder test. Long-gestation manufacturing requires something that services never demanded of us: the ability to hold a course for years while the numbers look bad.
That is the test the country has now set itself. Those of us who came up through the swadeshi movement argued for years that a nation which only services other people’s economies never quite becomes one itself. We were called protectionists, sometimes fairly. But the argument has aged well. Atmanirbhar Bharat, the production-linked incentive schemes, the semiconductor mission, the opening of defence manufacturing to private capital and the push on data centres all commit India to sectors where nothing pays back quickly. Go to Dholera, or to Hosur, or to the aerospace corridor outside Hyderabad, and what you notice is not the size of the projects but how unfinished they are. Foundations laid, partnerships signed, equipment on order, first revenues still some years away. That is exactly what a long-gestation portfolio looks like in its middle years, and the middle years are when projects die.
They rarely die of a shortage of money. Capital is the easy part; it can be raised in a quarter. What kills a ten-year project is a change of mind in year four. New management arrives, reviews the commitments made by the old, and reprices the risk. Partners who signed on the strength of a particular set of assurances go quiet. Timelines slip, first by a quarter and then by a year, and the government that spent half a decade courting the investment discovers that the courting has to begin again. Every finance ministry in Asia that has tried to build industrial capacity has a story like this. The successful ones, Japan and Korea in particular, are distinguished less by cleverness than by a refusal to change direction every time the road bent.
This is the lens through which I read the decision now before the board of Tata Sons on the tenure of its chairman, N. Chandrasekaran. I want to be careful here. Who runs a private company is, in the first instance, a matter for its shareholders and directors. But the Tata Group is not an ordinary private company. It employs more than ten lakh people. Its founder named his first textile venture the Swadeshi Mills in 1886, twenty years before the word became a national slogan, and was building Indian industry before there was an Indian state to support it. And in the last few years the group has walked, more than any other Indian business house, into the sectors on which the national manufacturing strategy depends.
Consider what has been committed under the present chairman. Electronics assembly for the world’s largest consumer technology company, now expanding in Tamil Nadu and Karnataka. A semiconductor fab and an assembly and test unit, the first of their kind in the country. Aerospace components for Boeing and Airbus made in Hyderabad and Nagpur. Air India back in Indian ownership after nearly seventy years, with Singapore Airlines choosing to invest in it rather than compete against it. And at TCS, the country’s largest IT company and the group’s cash engine, a workforce of six lakh people being steered through the biggest structural shift that industry has faced, as artificial intelligence changes what a software services firm actually sells. I should say plainly that none of this troubles me as a swadeshi. The older, narrower reading of swadeshi treated every foreign name on a factory gate as a defeat. The reading I hold, and I think the one the movement has largely arrived at, asks a different question: is the capability being built on Indian soil, under Indian ownership, with Indian workers? Where the answer is yes, a foreign partner is not a compromise. It is a shortcut, and a nation in a hurry should take shortcuts where it can find them. None of these projects is complete. All of them were negotiated by one management on the basis of one set of assumptions.
The economics of this is not complicated. Sunk costs are sunk; what matters is the expected return on what remains to be spent, and that expected return depends heavily on execution risk. Execution risk rises sharply when the people who made the commitments are no longer the people responsible for meeting them. Foreign partners know this. They price it. A change at the top of a group carrying this much of the national manufacturing agenda would be read, in Cupertino and Toulouse and Singapore, as a repricing of India risk, whatever the board’s intentions.
I hold no brief for any individual, and would make the same argument whoever occupied the chair at this stage of the cycle. The point is about the stage, not the person. Continuity of leadership when so much is half-built is not a reward for past performance. It is a hedge against the single largest risk facing a long-gestation portfolio, which is disruption in the middle years.
India has said it wants to move from doing the world’s work to building its own capacity. For those of us who argued for that shift when it was unfashionable, this is the moment we waited for, and also the moment we should be most careful with. We have the capital, the policy framework and the demand. What we are being asked to demonstrate now is patience, which is the one input no incentive scheme can provide. The board of Tata Sons will make its own decision. It should make it knowing that the country’s timelines, and not only the company’s, are on the table.
The writer is an economist, Director of the Centre for Economic Policy Research (CEPR) and a senior BJP functionary.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.