Economic Highlights

New Delhi, 7 November 2007

International Firms Arrive

INDIANS, BUILD UP BRANDS

By Dr. Vinod Mehta

(Former Research Director, ICSSR)

Brands have an important role to play in a buyers' market.  Once the brand value is established it is relatively easier to sell the goods.  The foreign brand names in this case have an edge over Indian brands.  However, with the economy booming, the time is ripe for Indian companies to start thinking in terms of establishing brand names for their products, not only in the domestic market but also in the international market.  They must have a time horizon of 15 to 20 years to establish their brands, which will bring them immense benefits for a number of years in the long run.

It is not an easy task, but Indian companies will have to learn to build up their brand names if they have to survive in the competitive market, both domestic and foreign.  There is nothing to be afraid of, as past experience shows that all foreign brands that entered India haven’t done so well. Therefore, instead of worrying about foreign brands coming to India, our companies should concentrate their energies on establishing their own brands worldwide.

About a decade ago a report in a weekly newspaper stated that the foreign brand names were crowding out Indian brand names in the domestic market.  It said that the multi-national corporations (MNCs) had purchased out 31 Indian brand names since their entry into the Indian market. Two most significant examples were in the soft drinks and ice cream sector.

In the 31 cases that had been cited, the Indian companies had sold their brands for various reasons ranging from making a fast buck as in the case of soft drinks and ice cream industry while the going was good, to the inability of the Indian partners to raise matching resources for the continuation of their partnership.

At one level, one would have wished these brands to survive and expected the Indian entrepreneurs to give a fight to the multi-nationals, but at another level there is little to mourn about the demise of some of those brand names. 

If one looks back in the Indian corporate history, one will find that even in the protected market environment a number of Indian brands that had emerged on the top simply disappeared from the market making way for other Indian brands to emerge.  This is a natural process of the survival of the fittest.  Those companies, which are run by non-professionals, who are unable to interpret the market signals even when the market is highly protected and monopolistic type, will never survive and in fact did not.  

For instance, a number of television manufacturers emerged on the scene in the early sixties when India was still in the black and white TV era.  The top names that emerged then were Televista, Weston and Standard.  After being at the top they just disappeared. The question is: who were responsible for the death of these brands when there was no outside competition per se?

 At one point of time, Murphy was on the top amongst radios but it too disappeared from the market. Two German manufacturing companies namely Telefunken and Grundig tried unsuccessfully to enter the Indian radio market in a joint venture with an Indian firm but both disappeared from the Indian market without a trace.

The moot question is that when no tears were shed when new Indian brands crowded out old brands from the domestic market, why should tears be shed when International brands are crowding out some Indian brands?

Commonsense economic explanation for the crowding out of Indian brand names by other local brand names was simple: those companies which were inefficient for one reason or the other had to make way for the more efficient.  The same logic would also apply in the case of multi-national companies crowding out inefficient and mismanaged Indian companies including their brand names. 

But, there have been certain exceptions when established brand names were sold out by their owners just to make loads of money.  For instance, in the soft drink sector owners of leader “Thumps Up” sold its brand to the Coca Cola company rather than fight it. Similarly, the Indian ice cream leader, namely “Kwality” sold out to Hindustan Lever (now Hindustan Unilever) to rake in money rather than fight back. 

Initially, the Godrej Soaps felt its business would not survive when international Camay soaps decided to enter the Indian market. Out of fear it joined hands with the Camay Group.  However, later the Godrej soap broke away from Camay and decided to compete with it on its own as it found that Camay soap had little demand in the country.   But, one should also keep in mind that when some established brand is being taken over by MNCe, there are other reputable Indian brands which are determined to put up a fight  as well as there are emerging brands which decide to take on these MNCs in the domestic market. 

Take the case of Amul and Mother Diary in ice cream sector, which has taken on Hindustan Lever's “Walls” ice cream headlong. Incidentally, it may be mentioned that this is within the organized sector only.  There is a vast unorganized sector in ice cream which no MNCs or even Amul would be able to compete.  In the cheese sector too, Amul has taken Britannia and Dabon cheese (now Lebon) headlong.

Similarly, a few years ago, in the soap and detergent sector it was the new Indian brand Nirma which gave Hindustan Lever a run for its money. Today, this Indian brand has decided to give a fight to international detergents like “Surf”, “Arial” and “Henko”, which are currently being sold in India.  Two foreign brands in toilet soap namely Camay and Imperial Lather are still struggling to establish themselves here. It may be observed that if foreign reputed brands find it difficult to establish themselves in India, it is going to be a tough fight for Indian brands to establish themselves in the overseas market.

This is what is required of an entrepreneur: to take risks, to  produce quality products and to compete in the international markets and emerge a winner.  By their actions, the owners of Kwality ice cream and Thumps Up have unfortunately revealed that they were only market operators and not entrepreneurs. Therefore, there is no need to weep over the fact that they sold their brands to the foreign competitors, instead look forward and see how Indian entrepreneurs can be encouraged to fight the MNCs not only in the home turf but also abroad and establish themselves.

These 15 years of economic reforms has belied the myth that foreign brands will always crowd out Indian brands.  One should be firm that the Indian brands have the capacity to give fight back both in domestic and international markets, provided they maintain consistent quality and keep prices competitive. Now, Indian companies need to change their outlook and become aggressive. ---INFA

 (Copyright, India News and Feature Alliance)

Economic Highlights

New Delhi, 1 November 2007

Innovation Key To Success

URGENT NEED TO FOCUS ON R&D

By Dhurjati Mukherjee

Innovation is the key to success according to the recently released World Bank report. This is borne out by investments in Research and Development (R&D) in the country, which grew seven-fold in 2004 as compared to 1991.

The report titled Unleashing India’s Innovation has pointed out that “liberal economic policies, transparency and relaxed import laws will provide better opportunities for small industries to grow bigger which will further enhance the investments in R & D”.

The report stressed that private firms, apart from enhancing skill development of employees, also need to spend more on innovation. In fact, after more than a decade of liberalization, 75-80 per cent of the expenditure on R & D was incurred by the public sector in 2005.

Unfortunately, the aggregate domestic spending on research and development has never exceeded one per cent of the GDP. This clearly revealed that the country is lacking on the innovation front and more efforts are needed. Specially, against the backdrop, that the GDP is surging ahead at a very fast rate for which R & D support is imperative.

Records reveal that multi-national companies (MNCs) have filed more patents in India over the past decade (1995-2005) than all of public and private institutions put together. Of the 50 applications for patents in India, 44 were from private firms.

The Council for Scientific & Industrial Research (CSIR) and the Defence Ministry were the two Indian public sector departments with the highest number of patents in the country followed by the Steel Authority of India. The two private companies that filed patents were Ranbaxy and Dr. Reddy’s Laboratories.

While India is emerging as a top global innovator in information technology and bio-technology, less than 3 per cent of the Indian workforce is in the modern private sector while 90 per cent remains in the informal sector where the productivity is quite low.

Besides, the report has found that the average enterprise productivity in finance, insurance and real estate companies is nearly 23 times than that in agriculture. But these industries account for only 1.3 per cent of national employment!

Pertinently, the World Bank report has aptly pointed out that “only economic policy will not be enough as there is a major divide and disparity in the population”. Whether it is education, health or even accessing mobile phones, there is a wide gap between urban and rural areas in the country.

It is in this context that Mark Dutz, the senior economist of the Bank and editor of the report, observed that “inclusive innovation can play a critical role in lowering the costs of goods and services and in creating income opportunities for poor people”.

For this to happen there is need for better coordination between the industry and the academic world. In India, as mentioned in the report, the private sector is not quite interested to fund R & D as a result of which the industry-academia relationship has not flourished. The lab-to-land approach also has become a myth and has yet to become a reality for which agricultural productivity has not increased to the desired levels.

A positive step to promote innovation would be the creation of district R & D centres or “innovation clusters” which would bring together user industries, technology solution providers, research institutions and the academia. Such clusters could provide the right ambience for innovation and result in considerable synergy between the different sectors.

Moreover, the Government would have to ensure that such clusters are set up at least in one out of every 4 or 5 districts and a plan of action evolved with the participation of universities. 

The former President, A.P.J. Kalam, a well-known space scientist, had repeatedly emphasized the need for better coordination between the universities, on the one hand, and the industry and agriculture, on the other so as to develop skills, innovation and productivity. President Kalam’s influence had a bearing on the Government’s decision to set up a few research institutions while increasing the number of Central universities in the country.

There is also a necessity that more agricultural universities should be opened which should have a direct contact with the farming community. Meanwhile, it is heartening to note that NASSCOM, the apex body of the IT industry, has proposed knowledge townships that would seek to bring institutional convergence.

There are signs of research picking up in some of the major economies. This is confirmed in a study which has projected that R & D is shifting from the US to Asia, specially India and China. In the next ten years, the global R & D activity will shake loose the near domination that the US has held for the past 50 years and be split into thirds between the US, European Union and China and India in terms of efforts, funds and activity.

The study conducted by the US-based Battelle, the world’s largest independent R & D organization, has pointed out that the long history of R & D inter-actions among US, western Europe and Japan has been growing to include the rest of Asia, specially India and China.    

One of the key factors driving the change is that outsourcing and off-shoring of R& D is becoming increasingly prevalent among all the players in the R & D enterprise with the US leading the trend. Close on the heels though are EU and Asia, increasingly off-shoring R & D to the US in order to be in a better position to enhance their market shares.

It is quite natural that competition for R & D funds will get more intense as globalization grows. Thus, companies aiming to understand the emerging trends in order to make the best investments and to capitalize on the global economy would have to reserve funds for innovation and research. India would be no exception and the latest trends reveal that there is a significant change from what one witnessed in the 90s.

As India has emerged a very strong economy, during the last few years, it is imperative that R & D should be give due attention to enhance its position further. There are scientists and engineers of very high calibre in the country, most of whom migrate abroad for lack of research facilities.

Things are destined to change and the thrust on research would definitely increase in the coming years with active support and encouragement from the Government and aided by the private sector.

Clearly, funds would not be constraint for a country of India’s stature as the benefits of increased R & D would be widespread. Importantly, as underscored by the World Bank report, the country needs to generate more income opportunities, increase exports, make goods more competitive and ensure a better livelihood for the poorer sections of society. ---- INFA

(Copyright India News and Feature Alliance)

Economic Highlights

New Delhi, 25 October 2007

Building Bridges With South-East

MULTI-LAYERED STRATEGY NEEDING

By Dr. Vinod Mehta

(Former Research Director, ICSSR)

One of the features of the Narasimha Rao Government’s liberal economic policies was to look towards the East, i.e., South-East Asia and later East Asia and Pacific countries for business, trade and investments.  This is being steadily pursued by all the Governments in power since 1991.

According to all available data and projections for the future, the Asian region is growing faster than the European or the American region, notwithstanding the melt down of South-East Asian economies a few years ago. This means that there are more business opportunities in the Asian region for Indian business as well as for the Asian business in India.

In the past more than one-and-a-half decade India’s trade ties with the South-East Asian and East Asian countries have increased significantly. Yet there is always a room for still more growth in trade ties. 

The Indian economy is already growing at the rate of nine per cent and the Eleventh Plan has put the target figure above nine per cent.  As against this, the individual Asian economies like Thailand, South Korea, Malaysia, Singapore, Indonesia and Taiwan are experiencing growth rates ranging between 8 per cent to 10 per cent. This indicates indirectly how the markets in these countries are growing and if India can develop comprehensive and an appropriate investment and trade strategy it can capture a part of this market.

It is, however, not going to be an easy task.  India will have to work hard, indeed very hard, to penetrate these markets as it has ignored this region for a very long time. In the meantime Japan, South Korea, Taiwan and other countries made huge investments and captured a big slice of these markets. Therefore, the strategy to come closer to the Asian countries will have to be a multi-layered strategy functioning simultaneously at various levels. 

The relationships established with the Asian countries in the past one-and-a-half decade needs to be vigorously followed up by Government to Government relationship like setting up of inter-governmental councils in the fields of economic affairs, education, science and technology, tourism and so on.

The regular exchange of parliamentary delegations as well as bureaucrats needs to be institutionalized.  This may be seen as confidence building measures to remove the pointless mutual suspicion that has crept into each others’ mind.

While building these measures we must also open our defence training colleges to military officers from the Asian countries. This is one way of underscoring the point that India has no territorial designs whatsoever and that it has the stability of the region uppermost in its mind. 

Already a few military officers from Thailand have been trained in Indian military colleges.  This defence link needs to be strengthened and institutionalized with almost all the South East Asian countries.  The most recent pact has been with the Singapore Government.

At the same time the Government needs to provide scholarships for higher education and research in India to students from these Asian countries.  This is one way of creating long term interest in India among the Asian countries.  Over a period of time India would have created an India lobby in these countries.

The last thing, which the Government needs to do in this direction, is to strengthen all types of communication infrastructure including air and shipping services.  India’s air connections with the capitals of Asian countries are less when compared with European countries or America.  India needs to be linked to almost all the Asian capitals by at least a daily air service. 

At the moment we have no direct air links with Indonesia, Philippines, Brunei, Cambodia, Vietnam, Laos and Myanmar. This comes in the way of fully exploiting the business opportunities that may exist between India and other Asian countries.

Apart from strengthening the communication infrastructure between India and capitals of the Asian countries, there is also a need to strengthen relationship in the financial sector including insurance. Till now either the American or the European banks have ensured their presence in India.

The presence of Asian banks has been negligible.  Some years ago the Bangkok Bank from Thailand and the Development Bank of Singapore (DBS Bank) have been permitted to open their offices in India and that is that. 

A clear cut policy needs to be developed here so that at least one bank from each of the Asian country has significant presence in India and one Indian bank present in almost all the Asian capitals. 

It may also be a good idea to start joint ventures with Asian insurance companies in the field of general and maritime insurance. This will make the financing of joint ventures in India and other Asian countries much easier.

While developing economic relations with the Asian countries, the role of the medium and small scale sector should not be ignored.  There are many medium and small enterprises in some of these Asian countries which have the latest technologies and may be willing to enter into technical collaboration with their Indian counterparts.  The field is very vast ranging from the manufacture of pencil sharpeners to plastic goods and auto parts. 

Unlike the large industrial houses which have the resources to strike deals on their own strength, the medium and small sector may need the support of some institutions like various chambers of commerce and industry.

Finally, to find a foothold in the Asian markets, Indian business will have to do a thorough research of the markets, consumer preferences and trading practices in each of the Asian countries.  The Japanese, European and American brand names are well established in these countries.

Moreover, the consumer in Asian country has become very price and quality conscious.  Therefore, to succeed in such a market, the Indian exporter and manufacturer will have to sell quality products at competitive prices.  This would also hold true for a large number of other commodities and services, which we may be thinking of exporting to these countries. 

What is needed is a collective effort on the part of Indian business to create a favourable image of themselves among both the individual and institutional consumers in Asian countries. 

Besides, the idea of free trade area between India and South-East Asian countries needs to be pursued vigorously.  From here we can then move to Latin American countries for increased trade as we are now presently doing. ---- INFA

(Copyright India News & Feature Alliance)

Economic Highlights

New Delhi, 18 October 2007

Govt’s Non-Productive Expenditure

CUT FLAB OF BULGING BUREAUCRACY

By Dr. Vinod Mehta

(Former Director, Research, ICSSR)

There is by and large a negative opinion about the bureaucracy and any new pay scales recommended by periodic Pay Commissions have been perceived as a burden on the Government finances. This was so when the recommendations of the Fifth Pay Commission were accepted a decade ago. If one goes by media reports then the pay scales being considered by the Sixth Pay Commission are likely to raise more hackles.

In the strictest economic sense of the term the work of the bureaucracy can be termed as "non-productive."  But there are other areas where there is wasteful expenditure by the Government. Therefore, sensible administrative policies can help reduce the expenditure of the Government substantially.

The term bureaucracy, used in a wider sense, includes not only Central Government employees but also those working in State Governments, various autonomous bodies functioning under various ministries of the Central and State Governments, railways, posts and telegraphs, universities, police and so on.

One component of the administrative expenditure is the salaries and wages of the employees (including certain allowances like LTC, medical etc). The second component is composed of expenditure on construction of office blocks, stationery, transport, postage, travel of personnel on official work, expenditure on numerous advisory committees, litigation etc.

Big Scope To Cut Flab

Almost all economists and policy makers agree that there is not only room but a very big scope for reducing the costs of administration. In most countries, especially in the developed ones, retrenchment and re-employment is a common feature. People move in and move out of Government jobs quite frequently. 

In India, however, the idea of retrenchment from a Government job is still not acceptable. This is understandable, because getting a job here is tough. Once a person has lost the job there is no guarantee that he or she will find a new job. Therefore, the direct approach of some of the developed economies will not work and should not be adopted. 

The way out for shedding bureaucratic fat lies in an indirect approach, which could be more suitable to our own conditions and also in consonance with our liberal economic reforms.

Rules A Roadblock

If one were to look at our Government service rules and regulations one will find that many of these rules are coming in the way of reducing the size of the bureaucracy even though the salaries and wages are a pittance compared to salaries and wages paid in the private sector.

According to the Government service rules, a Government employee is entitled to full pension after 33 years of service, leave encashment up to 300 days (a la Fifth Pay Commission), plus gratuity calculated on the basis of half a month salary for every year worked. 

A Government employee can also go on deputation to another Government office with all his privileges fully protected.  But if the same Government employee wishes to leave the Government job at any point to take up a job in the private sector or to start his own independent work, the Government rules strongly come in his way of getting out.

No Lien On Job

Firstly the Government employee cannot keep a lien on his job if he works in the private sector or sets up his own shop.  He is expected to resign. Secondly, if he resigns he loses his retirement benefits and to top it all loses the gratuity due to him and his accumulated leave, which he cannot encash.

This creates a psychological fear in the minds of those who quit Government service that if they don’t succeed in their new job they will have nothing to fall back upon. This is to some extent true. Besides, all those who leave Government job in the middle of their careers may not be successful in a new work place.

Therefore, what is required is a change in the service regulations of the Government which facilitates the exit of a Government employee and provides him some cushion in case he does not succeed in his new work.

Make Rules Liberal

Cleary, it is necessary to make the service rules more liberal. As a first step, those of the Government employees who wish to take up jobs in the private sector or start their own independent work may be allowed to keep lien on their jobs for a period of three years. This period is enough for anyone to make up his or her mind whether they wish to come back to their Government job or want to resign.

And if after three years they decide to resign from the Government job, then they should be allowed to leave, encash their accumulated leave, given the gratuity due to them and some monetary compensation for the retirement benefit which they would be losing if they chose to reign. Some formula on the basis of their basic pay and dearness allowance can be arrived at.

At a time when the gaps between the incomes of Government employees and employees in the non-Government sector are widening, the liberal service conditions will help a large number of Government employees to leave the Government jobs of their own will and thus help reduce the size of bureaucracy and in turn the cost of administration.

Need For Contractual Jobs

The Government can also introduce a kind of contractual employment at a higher level where the services of a specialist are needed for a specific purpose and for a specific period.  For instance, a non-specialist bureaucrat trying to develop a health policy with the help of a specialists committee. It may be less expensive to employ an expert or two in this field to prepare the policy. This will also help save a lot of money which currently goes into meeting the expenditure related to the organization of committee meetings which includes cost of air travel, daily maintenance, honorarium or sitting fee and so on.

To cut down the administrative expenditure that relates to the second component, as stated in the beginning, the Government will have to look into a gamut of ways --- conventional and non-conventional.  As a first step, the Government needs to adopt the rule of "minimum essential governance". 

An example. If some autonomous body under a ministry wishes to carry out a certain activity, the ministry need not enter into a lengthy correspondence with the autonomous body on this issue. It should only lay down the policy for their work and carry out periodic reviews to see if the policy is being followed or not. The idea of "minimum essential governance" can be extended to other areas also. When the Government adopts this idea the paper work will also be reduced considerably. 

Use More Computers

Again the large scale use of computers, E-mails and data transfer facilities in Government departments not only saves paper and postage but also precious time. All office memos, circulars, queries, orders can be made through networked computers in a fraction of time. Thus, saving large amounts of stationery, postage, messenger time, transport et al.

Similarly, the modern communication network can be used to hold committee meetings with experts sitting in their respective cities. This will help save costs on air travels, maintenance allowance and so on.  Needless to say, modern technology today has made it feasible to have a “paperless” and "travel-less" office.  This is a policy decision, which the Government must take at the earliest to save on administrative expenditure.

Computerization will definitely help reduce expenditure on transport, but still it may be useful to reduce and restrict the use of Government transport for official work.  It may be interesting to know that most of the organizations abroad (e.g. in Japan) do not have official cars even for their Chairmen.  Most of them either walk down to places of their work if they are nearby or use public transport like metro, bus or taxi to reach their office. 

Cut Transport Costs

True, our public transport system needs to be improved, but given the political will this is not a Herculean task.  Similarly the Government expenditure on telephones, electricity etc can be reduced considerably through suitable measures.

Thus, it is high time the Government introduces appropriate policies and takes suitable steps to reduce the size of the bulging bureaucracy and cut down expenditure on stationery, transport, committee meetings etc. to reduce the cost of administration and divert the funds to more purposeful activities like education and health. ---- INFA

(Copyright India News & Feature Alliance)