Saturday, May 19, 2012

Retrospecting India's IT High Rise

Book Review: Non-fiction/The Coalition of Competitors by Kiran Karnik, Collins Business, 187 pp; Rs399 (Hardback)
Nasscom has over the years played crucial parts as a leading industry body for IT sector in India. Twenty-five years back in Delhi, a meeting attended by spirited young entrepreneurs like, N.R. Narayana Murthy, Nandan Nilekani, Kiran Karnik and others resulted in the creation of this specialised industry body. Further that went on to change the face of India’s software industry. The growing existence of Nasscom sharply got stronger with the India’s economic reforms in 1991, and that immensely helped in unified representation of software industry’s business interest and its taking-off. The story behind the making of India’s software business from $400million in1991to over $60billion presently is well covered in this book.

For chronicalising India’s software business, Kiran Karnik is the most suitable thinker and practitioner with a tremendous track record of shaping a nascent Nasscom to the level of cresting high and also in successfully helping out the mastermindedly scam hit Satyam Computers in its painful transition. India’s IT high rise has indeed given its business a much needed “global synergy “with new bold impression in the broader world, which hitherto was a dream only. From a humble beginning of India’s computing, to the consistent endeavours in the resource scarce private sectors to the high rise have all covered lucidly inside the book.

In the 1980’s, GE group’s Jack Welch’s unusual interaction with Sam Pitroda (As Rajiv Gandhi’s special envoy) had change the course of action forever. A CEO of global stature suddenly became eager to outsource his company’s captive operational works to young entrepreneurs by simply relying on ideas. Interesting to know, those days Indian software companies were severely lacking with the required industrial skills and resources to execute global services orders, but then passion triumphed the adversities. This book beautifully clears that leadership has played pivotal role in the phenomenon rise of India’s software industry.

N.R. Narayana Murthi’s thanks giving to the governments since 1991 strengthens the notion that policies have also positively impacted the IT business. The multiplier effects of IT business have touched the lives in India, with direct or indirect two million jobs at different levels. But it’s also true that in the future, India’s stake in the cheap skilled labour would not remain unchallenged. So, Indian IT companies need a fresh strategy to cope with seamless challenges from the other emerging economies, trying hard to flourish in this domain at global level. The present regulatory lexes are the downside that is haunting the usual growth impetus of Indian industries; software sector is also not proof from such odds.

Unlike the other industries, IT sector can’t even think to survive on domestic demands-global integration is its first fundamental and overlooking it may dampen the spirits and edge that Indian companies have made through the last decades. As this book has more focus on the rising side of IT business, so it fails to see big challenges confronting under the guise of “west’s neo-protectionist drive” that may badly compress the long term prospects of global outsourcing business. Though at some points, Kiran Karnik seems trying to locate few challenges and their potential cure from the industry’s side-in retrospection, this book is worth of reading by those who have enthusiasm for policy issues but for knowing current holistic state of affairs in the IT business, this work may fall short!
Atul Kumar Thakur
May 19th, 2012, Saturday, 2012, New Delhi

In Times of Change

The recovery from the chronic global slowdown is only partially complete in both developed and developing countries. However, developing economies are better off depending on local conditions and medium-term productivity growth rather than the large, globally integrated, influential forces that dominated economic activity before the financial crisis, and still play an important role in moulding global regulatory policies. The robust growth registered in emerging economies in the last decade has thwarted suspicions regarding these blocks. Yet, several tensions and external events have the potential to disrupt the process of development.

Output is expected to come in stronger than anticipated in performing economies. The other case could be that very strong speculative capital flows that characterised the third quarter of 2010 may return. Either scenario could potentially accentuate inflationary pressures in the global economy: both those emanating from commodity markets and those coming from increasingly binding capacity constraints in a number of emerging markets. In such a scenario, which pre-supposes that policy tightening efforts underway are not sufficient to rein in demand, authorities would be obliged to tighten more aggressively in 2012, thus leading to a more pronounced slowdown in 2013.

The big dilemma confronting democratic governments is the choice between bailouts and debt waive off. Undoubtedly, capitalist prudence orders for the former. Often bailouts occur more frequently than mass waivers of debt, albeit India presents little difference with its distinct polity and populist commitments. Indeed, complete financial recovery could be a desired endgame, though conquering it would be a pipedream under the present circumstances in which regulators, governments and financial institutions are functioning across powerful economies.

Moreover, high fiscal deficits and rising sovereign debt pose medium-term challenges to a wide-range of OECD countries. So is it time for top rank global policy makers to acknowledge this epoch making economic shift in favour of emerging economies and start sending telepathic connections across the world?

Consumption Conundrum
The global economy has grown over the decades by relying heavily on American consumption and policy dominance (good or bad). This intensified with the disintegration of the USSR in 1991 as it resulted in the demise of an alternative ideological block. The structural force behind large US consumption has been a significant middle class. The middle class is an ambiguous social classification, broadly reflecting the ability to lead a comfortable life. But the current downturn has brought this process to a halt. US households are saving again in an effort to rebuild lost wealth. The consensus forecast is that this will be a lasting effect of the global financial crisis.

How can the world economy fill this void in global demand brought on by the retrenchment of the American consumer class? Naturally, the emerging middle class in China, India and other populous countries are moving to become the next global consumers under the changed set of conditions. But the policy support to achieve such a rebalancing is not easy in these countries facing different lacunas. In short, Asian consumption is tied, according to many analysts, to long-term institutional changes.

Shifting Nexus Of Power
At this decisive phase, as economies in Sub-Saharan Africa and the Middle East develop and open up to trade, links between Asia, the Middle East, and Africa are expected to grow further. Economic integration between these regions and the emergence of south-south trade will certainly result in the formation of influential trade hubs. The trade of the future will be determined by the availability of cheap resources and the destination of final demand; this would be a big accomplishment for these hitherto tail-spinning economies. Big corporations from the developed economies have already begun to question whether the challenges of outsourcing their production processes outweigh the benefits of producing locally. In this respect, Africa and the Middle East offer both low-cost production capabilities as well as a rapidly growing domestic market.
It is becoming rather obvious that China may be losing its status as the "manufacturing leader." Cost economics that have long worked in China's favour have come full circle: domestic wages are on the rise, eroding much of the cost arbitrage offered to foreign companies. Even Chinese companies are affected as improving living conditions in the hinterland discourage potential migrants from seeking work in urban coastal provinces. Furthermore, an aging population in the next decade will likely weigh down labour supply and impact wage competitiveness. As Chinese production moves up the value chain, workers are demanding higher wages, better working conditions, and added welfare benefits. Thus, rising labour costs, along with pressure to loosen control on its exchange rate, could pose a serious threat to China's international competitiveness if productivity does not correspondingly improve.

Intermediate production, rather than locally produced finished goods, as an economic structure presents immense opportunities for emerging markets to develop specific capabilities and capture a bigger share of the supply chain. From a company's perspective, an emerging trade network with a wide portfolio of capabilities allows for diversification in the supply chain rather than extreme reliance on a single country whose competitiveness may be decreasing.

Nonetheless, China will remain an important, if not dominant, player in the future. The country's burgeoning middle class is set to become more affluent and boost consumption levels in the next decade. The head of emerging markets at Morgan Stanley, Ruchir Sharma's newly published book, Breakout Nations: In pursuit of new economic miracles gives some lucid views about the new wave of competency coming from the side of emerging economies.

Challenges On Home Ground
The cheap flow of foreign capital had made Asian economies such as China and Japan exclusively powerful in the region for a long time before opening of other economies, primarily India. But lately both Chinese and Japanese economies are under excessive strain because of their over integration with western nations. The case with India is different because liberalisation took place later and with active regulatory restraints.

Raghuram Rajan in his remarkable work, Fault Lines mentions India's growing income inequality and the dangers that a social underclass poses to the country's economic future. His strong emphasis on the ills of maturing cronyism in India's power centre is worthy enough to be considered as a grave threat to the essence of India's constitutional mandate. Rajan is right in pointing out the growing numbers of Indian billionaires are mostly products of networking rather than enterprise.

For the last several months, the Indian economy has been consistently juggling between controlling inflation and maintaining robust economic growth. In order to control spiralling inflation, the Reserve Bank of India chose to sacrifice growth in order to check the inflation. The 20-month period, until October 2011, of rising interest rates has slowly but surely put the brakes on economic growth.

For keeping alive the basic mandate of India's growth, the wave of policy/regulatory laxes need to be checked at any cost and synergising efforts should be made to retrieve Indian economy's lost confidence. Instead for unwarranted follow-up laws, we require an overhaul in the existing regulatory framework;India can't afford an ill policy regime.

Inflation, that had threatened to derail India's growth for several months, had shown signs of weakening in the recent past weeks. However, inflation is on the rise again, and it is likely to stay in the 7.0-9.0 percent range in the coming months. The central bank cannot afford to conclude that inflation will stabilise in the medium term. So far in 2012, the RBI has already eased the reserve requirements for banks, infusing liquidity into the economy. It is likely that further liquidity could be infused into the economy in the coming months. Measures to ease liquidity may, however, not be enough to provide a much-needed fillip to the economy.

Growth is slowing down, investment is falling, and business sentiment is on the decline. In the absence of any credible government action, the central bank may not be able to stave off calls for reducing interest rates for too long. Questions about whether or not the interest rate will be reduced ahead are giving way to when and how dramatically it will be cut.

Leading social historian, Ramchandra Guha's assertion that the India's economy is a fifty-fifty economy, best reflects the trend, and our economy has been following since 1991. Making Indian economy hundred percent functional should be the prime task of policy makers-the two basic ideas cam materialise this dream-growth with equity and emancipation of the marginalised with ensuring lowest possible economic disparities. Under a mixed or market driven economy, nothing more could be anticipated.
Atul Kumar Thakur
(Published in Businessworld, May16th 2012)

Thursday, May 17, 2012

Loud thinking on economic issues just creates confusion

Book Review: Non-fiction/The Next Convergence by Michael Spence, Random House, 296 pp; Rs499 (Paperback)

Many of our most celebrated economists’ effort in surprisingly oversimplified or sensationalized rhetoric, especially in times of market uncertainty. Michael Spence has long been pointing out the fault lines that interfere with competent markets. He won the Nobel Prize in economics for working on the same theme in 2001, together with George Akerlof and Joseph Stiglitz. Here, Michael Spence’s new book, “The Next Convergence”, warns of the rough patches that arise when the world tries to accommodate both rapidly-growing emerging economies like India and China and slow-growing USA and western European economies.
This book refers that in the decades since 1950, as political, social and technological barriers fell, the growth impetus spread to populous developing economies, particularly in Asia. So far, such convergence has been unheard off- as only thirteen developing countries have managed to grow at an average rate of 7 per cent or more in first twenty five years. The formula for success is evident like buzz-embarrass the spirit of capitalism and get into the vibrant world of globalized trade. Nevertheless, nor is that easy bandwagon for success quite as achievable as many free-market economists would have us believe.
In 1950, author writes, “the average incomes of people living in these countries had raised twenty times, from about $500 per year to over $10,000 per year.” Though ironically, he missed stressing, these blocks account just fifteen percent of the earth’s total population. In recent years Spence has been majorly preoccupied with the economics of development and growth, and his active concentration in laissez-faire’s flaws has stayed with him. His book however is not sure about this nor, unfortunately, of many of the other macroeconomic policy issues he tackles. “The Next Convergence” adds hardly anything new as an overrated book and author’s relentless loud thinking on contemporary economic issues creates more confusion than solution.
The book primarily tries to survey the current state of both the growth and development economics, but without having standing to deal with the complexities of foreign aid, trade liberalisation, natural resources and the difficulty that countries experience when they begin evolving from middle-income nations to the next level economies. Any anticipation for breaking little new ground would be over expectation from this work, which is akin to rest on the broad generalities, finally leaving little in terms of outcome. The book has more questions than answers that may or not be bad enough but from readers’ perspective such mode of narration is hardly satisfying.
The crux of Michael Spence’s book exposes that future of global economy is going to be promising, in which perhaps 75 per cent of humanity will enjoy standards of living similar to those of today’s high-income countries by the middle of this century. Such unrealistic optimism seems based more on the ground of feeble research and weird hypotheses. Though, he further contradicts his own optimism by citing the potential risks against the future high growth in developing economies.
Lastly, his four findings are not new though gives the book some ideational foreground, to recognise the limits of one’s knowledge and the need to feel the way; appreciate the benefits of adversity; understand that sustainable wealth is built on people; finally, realise that governance matters. Altogether, these four are the Spence’s superstructure for “The Next Convergence” in a multispeed world!
Atul Kumar Thakur
May 17th, 2012, Thursday, 2012, New Delhi
(Published in The Financial World/Tehelka on May15th,2012)