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'India is not the best country to invest'

A PhD in business economics, Pankaj Ghemawat, in 1991, became the youngest 'full professor' at the Harvard University's Graduate School of Business Administration.

The Jaime and Josefina Chua Tiampo Professor of Business Administration, after receiving his doctorate, worked as a consultant with McKinsey & Company in London during 1982-83, and then joined the Harvard faculty.

Between 1995 and 1998, he headed the School's required first-year course on competition and strategy. He currently teaches the elective course, 'Globalisation and Strategy'.

His research in this area focuses on the dynamics of globalisation and generic strategies for globalising firms.

He serves on the editorial boards of Management Science, the Journal of Economics and Management Strategy and the Strategic Management Journal.

When he was recently in Chennai to deliver a lecture on 'India in the era of globalisation' at the Confederation of Indian Industry meet, Ghemawat spoke to Shobha Warrier on issues ranging from what plagues the Indian economy to the effects of liberalisation on the country's economy.

The revenue secretary recently said that the government has taken the right decision and has created a congenial atmosphere for the industry to prosper. But the industry complains it is not allowed to perform. Your comments, please.

No, I don't agree. The mindset ten years after reforms is, 'Yes, we will allow the private sector to do what it wants if it can show us a good idea.' There should be a shift in this and people should be allowed to do what they want.

It is not as if the government is giving tax money to the people. From the corporates' standpoint, this does not deliver anything that they want or need. For example, the industry lacks quality infrastructure. I find it a bit difficult to accept the notion that the government somehow is giving these people money and they are making good use of it! It is not the government's money, in the first place.

Indian bureaucrats tend to follow a particular path. It is the mindset issue rather than a cognitive capability issue. If the people in-charge can't find a way of running the country better, it is a colossal failure on their part. It doesn't cost them as much as it costs the 300-500 million people who live below the poverty line.

I think from a social welfare standpoint, we have done a disgraceful job over the last fifty years. While the private sector cannot afford to be oblivious of social welfare and social initiatives, the government, too, cannot say, 'We have given you all this money, why don't you develop the country?'

A business run with too many objective functions would probably run as bad as a government.

Again, it is not just the industry that you are talking about. Where are the expenditures on primary education? Every study I have seen suggests the highest social returns come from seeing to it that people, particularly girls, are educated. Just look at the spending on primary education in India since Independence.. it is pathetic. Why do subsidies take precedence over sending our children to school?

I understand that the government has many capable people who are caught up in a system they don't like but ultimately one has to take responsibility for governmental performance. I don't know how anybody with a straight face could say that the Indian government has performed well!

Do you think the attitude of the people towards globalisation is changing?

Anti-globalisation movement is very active, particularly in Europe. There is a new dynamic wave. If the 1990s saw an euphoria about globalisation and decontrol, there are some second thoughts underway now.

Do you think these protest may lead to some changes in the way globalisation is taking place?

This is a process that has gone on for 200 years. Frankly, I feel it will take a little more than 2 or 3 years of street demonstrations. I think people who have been proved wrong are the people who believed that this is a monotonic process without any bumps in the road.

I think from a company's standpoint, counting on increased globalisation is a right idea. Probably, the recognition that there will be ups and downs is just as important before setting a long-term strategy.

Will the pro-globalisation lobby start thinking differently after what happened to the Argentine economy?

Argentina, since the 1920s, has been spending more than it could afford to. In 1928, it was the third-richest country in the world. They had a mentality where they took their natural resources and sold them.

Finally time caught up with Argentina. During the 1990s, they sold off most of their economy to foreigners, which is fine but they didn't invest the proceeds, they didn't upgrade, they were into foreign exchange arrangements. So now, they have no assets left and they are bankrupt.

What are the lessons to be learnt from all this?

Many obvious ones. Place an emphasis on productivity growth as opposed to just borrowing. This must be a good one for the Indian government to ponder as we run about borrowing abroad. So invest in productivity instead of mortgaging the future on subsidy schemes and the like.

Second, recognise that there will be upturns and downturns in international markets.

Third, value upgradation doesn't happen automatically. In Argentina, given the structure of incentives, post-reform, the country actually de-industrialised. So it basically shifted back to being a commodity exporter.

When India opened up its economy in 1991, the talk was about trickling down of the benefits from the top to the bottom. A decade later, the gap between the rich and the poor has only widened. Why?

This had to happen. It shows the political weaknesses of the reforms programme. Maybe it was because we had wonderfully capable but technocratic finance ministers. Politician-finance ministers would have been different.

I am struck by the absence of any kind of spelling out of vision, how to make a difference in the life of somebody in the bottom 30 per cent in the village. Most Indians are yet to feel the effects one-way or the other.

On an average, if you look at Indian incomes, you expect them to get a little bit closer to incomes in the West as a result of the trade, not total income convergence but partial income convergence. The problem is distributional when you have a big chunk of the population that is still illiterate.

In the globalised world, where does India stand? How do other countries look at India?

The amount of excitement about India amongst foreign investors is close to zero right now. They look at India in a comparative perspective. It is a lot worse in many dimensions than other countries. You invest in a country after looking at a whole set of options, and taking the best one that is right for you.

India, unfortunately is not the best country to invest. Until we become economically strong, we are not going to be taken seriously, politically or in any other form.

India, China are often compared as big markets that foreign investors find lucrative…..

So many foreign investors have burnt their fingers. In the 1990s, there was a discussion among them as to the size of the Indian middle class. 10 million, 20 million, 50 million… some guys calculated it as 150 million!

So there was a huge disappointment on the part of the consumer products' MNCs in general about the purchasing power of this 'middle class'. They were trying to make money in dollars.

They look at what products they can sell here. They now say this is not an interesting market!

Is inflow of FDI very important for a developing economy?

If the government did a little better job of putting its finances in order and use all the money that the economy generates, maybe we wouldn't need this much FDI.

Especially with a profligate government, essentially crowding out private sector investment, where is the money going to come from? If public finances are managed better, maybe we would have the money for infrastructure on our own. But we don't have. They are not probably going to be managed appreciably better!

According to your presentation, while China's projected FDI was $32 billion, the actual is $44 compared to India's actual FDI of $ 2.6 billion while its projected $26 billion. Why do the figures differ so much?

That's because the figures of China are a little distorted. But nobody can say that we have a reasonable amount of foreign direct investment coming into this country. This is not a view that even the policymakers expressed. The difference between the projected and actual FDI is because of limited attractiveness of India, as the domestic Indian market has failed to live upto people's expectations

And in most manufacturing sectors, India does not have any hope of becoming a manufacturing base for other markets. So you have got to invest somewhere else as a good platform for exports to the rest of the region.

Where do you see India after one more decade of liberalisation?

I think we will be bumping along, probably at 4 or 5 per cent rate, probably have the same discussions that we had. It is not a very optimistic vision.

But if you are asking me for my candid opinion, having seen this go on for 11 years already, I can easily see this going on for another 11 more years.

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