University of Madras School of Commerce Lecture - or - The "Sudden" Rise of India's Economy

We met with a professor in a conference room where he proceeded to give us a complete 45 minutes lecture with no notes and no interruptions. The students had a bit of a hard time listening to his elaborate analysis with no accompanying power point slides or handouts. He only allowed them to ask questions at the end, so we all tried their best to write down what he said and do the thinking after he finished. Yet, his lecture was very informative and gave an excellent overview that was critical to the understanding of all the next meetings we were going to have.

Professor Ranganatham talked to us about the change process to globalization that India has been undergoing since the beginning of the 90’s. He explained that in ’91 to ’92 a major reform took place in the country’s economy. Previously there was not a major process of change in the country. What triggered this important event was that several major events took place in those 2 years:
1) The Soviet Union, who was a major ally of India, has crumbled which caused a tremendous change in Eastern Europe. India had to start looking for new partners, especially trade partners.
2) India’s foreign exchange position reached a negative balance in ’89-’90 and the country had to borrow money against its gold reserves from the Bank of England in order to continue to run the country.
3) India had borrowed $5 billion from the IMF and was in no position to pay it back at that time, which necessitated an economic reform to take place
4) There was greater emphasis until that time on the public sector that controlled all private initiatives. The 4-5 trillion rupees the government was spending yielded not even a 3-4% ROI. So the manufacturing sector (that was controlled by the government) , for example, was totally failing.
5)
In 1989 Peter Drucker came to Bangalore (where 10,000 people came to hear him speak) sponsored by India’s premier watch making company. The question was asked why should a government-owned watch maker who has been only accumulating losses continue to be a leader in the country? Why should India continue to operate like that? This event made it clear that the country was in dire need of economic reform, which Drucker made a call for.

As a result, a push for economic reform has gotten off the ground which is still ongoing today. Here are some of the key areas of that reform:

I. The legal framework has undergone tremendous change in the last 15 years. All along the economy was labeled as a “controlled” one. There was no freedom for any economic activity. So that is why the reform started with the legal system. Private enterprises had ceilings for capital investments, for example. The law was Draconian, so the government diluted the MIT Act so they can re-state the economic engine. Only the “unfair trade” practices remained. FERA was the second foreign exchange. For everything you needed to be regulated by the government so no partnerships and FDI could take place. Now the Act is called “Foreign Exchange Management Act” and the government can only interfere if there is a breaking of the law. The Ministry of Company Affairs has a CCI that used to decide how much dividend can be paid from companies, what should be the value of the financial investments, etc. Now it all of this is abolished! Companies can raise capital, sell stocks as they please. The legal framework was a major impediment to India’s economic development! Now finally all private enterprises have the freedom to operate as they wish.
II. Capital markets and financial sectors have been formed as well. New institutions were established to regulate the market, like the Security Exchange Board of India. The manner in which capital issues are traded – a few individuals were controlling it but now it is more transparent. Stock exchange in Mumbai has introduced a scripless, ringless and security deposit risk. National security repository has been established and it is fully electronic so all stock exchanges are inter-linked and you can settle transactions instantly. Investors can verify stocks’ real value, so you have full transparency! India now has: VC funds, mutual funds were also expanded considerably. Stock brokerages are no longer held by individuals or families. Now they have corporations and foreign ones can also participate. FII’s are coming in a big way!
III. The insurance sector is also undergoing a reform with pension funds already being privatized. However, no life and general insurance have been privatized yet. The banking sector is privatized now and foreign banks are expanding.
IV. Stock investment instruments have been introduced which are given to banks as a guarantee so the investors do not need to provide “free income” to companies like before. Also, triple options bonds have been introduced into the market.
V. Exports have gone up and revenues of outsourcing have gone up as well but other sectors are NOT doing as well, like, manufacturing, agribusiness and so on.

VI. WTO disputes are huge still! Even though developing countries talk about transparencies, they are still to bring it into their own countries. They protect their own interests. If a trade dispute goes to WTO, many countries cannot face the resources to fight and have no legal way to do this.

VII. Intellectual property rights are a challenge in a country like India where word of mouth is the tradition so there is no way to establish the ownership of knowledge. For example, there is patent dispute right now based on a 1986 article published about a scientific breakthrough that has documented knowledge that has been around the scientific community in India for centuries but with no written records! WTO is currently helping India streamline its patent laws.

VIII. Developing countries are still finding it difficult to find fair treatment in international organizations. However, having negotiations is a good sign because it helps India reach its own consensus base. The most helpful are regional bodies.

IX. Despite all of this progress, there is still a great sense of helplessness in the country since it is very difficult to fight the government. In order to participate in the process, a new Act has been introduced so by paying less than 40 cents, any citizen of the country can now seek ANY information from ANY public institution!

X. Yet 25% of the population is still very poor (note: that number, by the way, keeps fluctuating between 70% to 20% based on whom we talked to) nad public opinion needs to be more mobilized.

We ended up by getting to ask some questions, some which centered on the companies we were going to visit who represented the outsourcing trend to India. And he is what he said:

“The youth of India think that outsourcing is a gift given to them. There is a huge movement in favor of creating BPO’s and Call Centers. This introduced work shift systems and forced women to work at night. Therefore the initial attractiveness is now lost. Most young people consider this industry as a short term employment only. Since no unions are allowed, employees have no protection and there is a lot of stress in that working environment (note: in our coming visits we learned what Indian companies are doing to combat that). With young people working in that industry the power has shifted in their families form the parents to the children. This represents a HUGE social change. Marriages are being postponed and young people’s time stay in the family is reduced. As a result of this, call centers are now moving to smaller towns in search of capable people who are willing to work in the industry.” He told us that he feels China can outbid India on many jobs in the next 10 years unless the political parties learn how to accept the globalization is irreversible.”

He also talked in general about India’s seemingly lead in IT know-how: “ The IT and IT services sector is perceived to be doing great in India but the administration is not fully ready for it. It is NOT part of India’s industry and government yet. Services need to be improved and lots of inefficiencies eliminated. The domestic market has not been tapped. There is a lot of work to be done. But at the university, we have introduced distance learning and this weekend have a number of representatives from African universities coming our university to discuss how they can access courses we are offering online. Laos, there is now a reversal of India’s “brain drain” with many IT people coming back to the country, which is a good sign”

He concluded by answering a question about entrepreneurship in India. He said that in his opinion entrepreneurship initiatives should not come from the government. Just providing training to people is not enough to make them successful as entrepreneurs. Banks are investing in providing training to those they lend money to for opening a new business, the government has training institutes in all states and all major universities have programs in entrepreneurship. Yet the rate of success in the country is less than 14%. “Business sense is NOT found in all students. Very few of them even show an interest in the stock market. “