India Inc Cowers in the Chinese Shadow

India Inc looks right now like the Taliban — demoralised, in retreat, and thoroughly uncertain of its future. The NCAER index of business confidence is at a two-year low, having slumped from 107.4 in January 2000 to 82.8 last month.

Industrial growth in September was a pathetic 1.6 per cent, and the rate for the first half of the fiscal year was only 2.3 percent.

Exports, which galloped upwards by 20 per cent last year, are actually falling. The services sector has long been the saviour of India Inc, but the bursting of the technology bubble has sent software share prices crashing to 10 per cent or less of their peak value. Only the pharma sector has held its ground.

The Manhattan bombing on September 11 pushed the world economy, which was on the brink of recession, over the edge.

The silver lining is that Wall Street expects a recovery by the middle of 2002, and so share prices have now recovered and risen above the September 11 level. But the global economy continues to plunge downward.

The privatisation of Hindustan Zinc was torpedoed by the recession, which halved world zinc prices.

Most bidders for Hindustan Zinc opted out at the last minute, and the only remaining bid was below the reserve price.

Several hotels put up for privatisation attracted no bids at all, since the Manhattan bombing has killed tourism and the airline business. For this reason, Air India and Indian Airlines look less saleable than ever.

Interest rates have fallen sharply in the last year, enabling some top corporates to raise fresh money at the cheapest rates in memory — under 9 per cent.

But the inflation rate for manufactures is now close to zero, which means that real interest rates continue to be sky-high. Labour laws have not been liberalised, as promised by the finance minister in his budget speech.

Red tape and corruption remain major problems. Infrastructure remains a mess, as exemplified by Dabhol.

The monsoon has been good, yet rural demand has not picked up, as Hindustan Lever will tell you mournfully. There are a few bright spots — two-wheelers are doing very well, the market for trucks is picking up, and some consumer durables are weathering the storm. But for every industry doing well, four are doing badly.

The global recession is only part of the problem. More menacing by far is the helpless feeling of Indian businessmen that they cannot compete with China in manufacturing.

They are not alone: China has hammered the once-proud manufacturers of South East Asia too. All Asian countries have devalued heavily against the Chinese yuan, but in vain.

The strong yuan makes raw materials in China dirt cheap, interest rates are just 6 per cent and inflation close to zero, labour is docile and productive, infrastructure is cheap and growing rapidly.

Some Indian industrialists want high tariff barriers to protect themselves. Others have decided to jump onto the Chinese bandwagon. Bajaj Electricals and Usha International now get their fans from China, Bharti Telecom sources cordless telephones from there, and Bajaj Auto plans to source two-wheelers from there.

JK Industries will tap China to make tyres for the world market. Even Infosys intends to use Chinese computer engineers. If you cant beat them, join them.

India Inc feels it cannot compete with China on land or capital cost, power cost, labour productivity, or raw material cost. Where, then, is it competitive? In two things: knowledge of English, and computer software.

Knowledge of English helps directly in software, since it is the dominant computer language. But it is even more important in teleworking — in the wide range of office operations that can be shifted by modern communications and the internet from the West to India.

This takes advantage of not just low-wage, English-speaking Indians but the difference in time zones — while Americans sleep, their back-office work can be done in India.

Call centres now train Indian operators to speak with an American accent, and they can take over a host of western operations.

Cynics say that a Punjabi American accent sounds pretty awful. But a Cantonese-American accent is apparently even worse, and so India retains an edge.

More than a million new jobs are likely to come up in various forms of teleworking, leaving the Chinese way behind.

And while China will doubtless whittle down India’s early lead in computer software, the superior social skills of Indians in Silicon Valley — they are great networkers — will make them more competitive.

For most of the 20th century, India Inc complained of suffering from two historical ills, British colonialism and the brain drain.

British colonialism was accused of keeping India backward for decades, and attempts to plug the skill gap after independence were constantly undercut by the brain drain.

But today our knowledge of English, a legacy of the British Raj, suddenly appears to be a tremendous blessing. And the brain drain to Silicon Valley has become the very foundation of our comparative advantage in software.

The two supposed historical evils are proving to be our main competitive advantage over the Chinese. Maybe India Inc should commission a new economic history of the country.

What do you think?