ECONOMIC HIGHLIGHTS

New Delhi, 23 January 2008

Growth Of Small Sector

KEEPING UP WITH THE MNCs

By Dr. Vinod Mehta

Former Director, Research, ICSSR

It was feared that the economic reforms which generally favoured big industries would undermine the existence and development of small and tiny units. However, the developments of the past one and a half decade show that the small sector far from being undermined is not only surviving the competition but is also growing and changing to adapt to the new marketing environment. 

Short of entering into expensive and sometimes unwinable advertising wars, the small, the tiny and the unorganized sector are concentrating on quality aspects of marketing to retain and expand their share of the market. Some have even tied up with the bigger companies in the form of backend linkages for supplying of certain components to one single manufacturer. These are the stories coming out of small and medium towns of India.

Two, even as we always perceive one monolithic market for one kind of product, the reality is somewhat different. For practical purposes the market can be broadly divided into two categories --- a market of individual or family buyers and a market of institutional buyers (like hotels, hotels, canteens, offices, establishments etc). The individual buyers usually buy things in small quantities while institutional buyers buy in bulk; the institutional buyers are relatively more cost-conscious than individual buyers. Again, in the case of an individual or a family buyer it is the carry home pay-packet which generally determines its demand pattern.

Finally, within these two broad categories of markets, namely individual and institutional, there are various layers of markets catering to different segments of people and institutions. For instance, both a five star hotel restaurant and a dhaba need edible oil for cooking purposes but both will use different qualities of edible oil, and hence their sources or procurement would be different. Besides, the products of the MNCs and large industrial houses may appeal to the people of upper income brackets and to the institutions patronized by them but the vast majority will still be attracted to goods which are relatively cheaper and produced in the small sector.

Coming to the changes that are occurring in the small scale sector, we find that one of the consequences of the liberal economic policies has been that both the consumers and the producers have suddenly become conscious of quality. The consumers are now demanding quality products at competitive prices. The small scale sector including the tiny sector has started responding to this by improving the quality of their products. 

From biscuits and other bakery products, readymade garments to food processors and coolers one can see a significant improvement in the quality of their products --- in some products the improvement is more and in some others it is less.  But the most important fact is that the small scale sector has come to realize that it cannot survive without improving the quality of its products and that it has to be constantly innovative. Since these units cannot advertise their products, one has to see for oneself the quality of their products in actual shops.

The second consequence of liberalization for the small scale sector has been that it has now started paying serious attention to packaging. The goods are now being packed by them in colourful attractive packages. Be it biscuits or bread, a shirt or a jean, a bath soap or a detergent powder. The individual shopkeepers of groceries can now be seen cleaning bulk products like pulses and packaging them in convenient packs for retail sale.  Similarly, new garments being sold on the roadside are being packed in a similar fashion as those in big stores. Many things which the shopkeepers used to weigh in front of us are today sold in a pre-packaged form.

Thirdly, the small and the tiny sector have also started using brand names for their products. Though these brands are seldom advertised, yet the small scale sector is attempting to build its own brand following despite being limited to a particular territory.  For instance, a few years ago, Delhi citizens could buy bread made by one of the two big bread manufacturers or from one of the numerous small bakeries. But in the past 10 years apart from the two big bread manufacturers, a large number of other branded breads from the small scale sector are being sold in large numbers in Delhi.

Fourthly, the concept of neighbourhood provision stores is slowly giving way to supermarkets of all kinds where all the products for sale are displayed on the shelves. One finds the products of the small sale sector getting the same exposure as the products of the large sector leaving the decision to the consumers.  This was not possible under the old concept of provision stores where one had to demand an item by name.

As far as the non-food sector is concerned, the small scale units are upgrading their technical base with help from large companies with which they may have backend linkages like auto parts. Since large companies outsource the manufacture of their small components they also maintain quality control by helping these units buy and assimilate new technologies. In these kinds of backend linkages the small scale units do not have to worry about their sale targets.

There are some problems with the small scale units in rural areas as their demand base is limited to a few nearby villages and have almost no forward linkages with large companies to sustain them. Thus, there is an urgent need to study the impact of economic reforms on the small scale and tiny units in rural areas and then devise policy measures to help them to sustain themselves.

There is no gainsaying that the small scale sector, far from being overawed by the MNCs and by the large domestic sector has not only changed but is still continuing to change with the times, adopting new approaches and strategies to stay put in the vast Indian market.

Going by the experience of the past 15 years, competition from the MNCs and the large domestic companies has not spelt the death knell of the small sector. Besides, if the country were to fully de-reserve the small sector, it would not only survive but become more robust.  It has its own dynamics. --- INFA

(Copyright India News & Feature Alliance)

ECONOMIC HIGHLIGHTS

New Delhi, 17 January 2008

Joining Developed Nations League

GET CRACKING ON INFRASTRUCTURE 

By Dr. Vinod Mehta

(Former Director, Research ICSSR)

For almost five decades India was content to be known as a “developing” or a “Third World” country.  Then in the last decade of the 20th century economic reforms happened and the growth rate doubled from around 4 per cent to 8 per cent and India came to be known as the “emerging” economy, one of the fastest growing economies in the world after China. 

The developments of the past one and a half decade have brought a sea change in the thinking of some of our leaders. They all want that India should become a developed country in the next few years. It was the former President of India, A.P.J. Abdul Kalam, who in his book “Vision 2020” shared his vision of India as a developed nation.

The average citizen has also started thinking in those terms. The date 2020 is not sacrosanct in the sense that on 1 January 2020 we would become a developed nation like Japan or Germany. The important thing is that we should start working in that direction and endeavour to achieve that goal say in the next 20 to 25 years. The timing is correct, what we need is a clear road-map to achieve that status. The Eleventh Five Year Plan could be termed as a beginning point for our journey towards a developed country.

Some people may think of it as a cynical idea. Even after 60 years of Independence we have not been able to ensure safe drinking water to every person or achieve 100% literacy so why talk about India as developed nation? Well this is a brute fact and should be recognized so, and efforts doubled to solve these issues on an urgent basis.

However, it is the vision which is very important. Nehru had a vision of India as a developed country over a period of time. This vision led him to set up institutions like the IITs, IIMs, Centre for Scientific & Industrial Research, Indian Space Research Organisation, Atomic Energy Commission. Defence Research & Development Organisation, Agricultural universities, AIIMS and even research in the field of social sciences and humanities.

People had at that time also laughed at him but today after 60 years the achievements by Indian scientists, engineers, doctors, managers, social scientists are known the world over. We are at a stage now where we can talk about and think about   achieving the status of a developed country in the coming years.

The eyes of many countries are focused on India. The events and developments are being closely watched by them. There are some powers which would not like India to become a developed nation and so are engaged in pinpricking. It could take the form of denial of certain technologies or ill-treatment of software personnel, medical doctors etc. Therefore, keeping in mind that other countries would like to stall or delay our march towards a developed nation, we must have a clearly defined path to achieve the goal of becoming a developed nation.

As a first step, problems like illiteracy, lack of safe drinking water which have been with us since Independence need to be tackled on a war footing. Most of the diseases are water borne. If we can ensure safe drinking water to everyone the health of the population will generally improve and there will be less pressure on our hospitals.

As far as education is concerned it is simply not enough to have literate people but people with a qualification up to a minimum school level say 10th standard. If the country is going to use computers in almost every aspect of life, it is essential that the population is educated enough to handle and work on these gadgets. The Knowledge Commission has rightly emphasized the quality aspect of our elementary and higher education.

Having said that, let’s now try to build on our strengths. As we know, the process of economic reforms is on for the past 15 years. In the past one and a half decade many new first time entrepreneurs have emerged in the country such as Infosys, Wipro and many others. The process of economic reforms needs to be accelerated further so that we are able to complete this process in the next five years.

If the economy is competitive in the international market it will automatically become a strong over a period of time. Without a strong economy and a strong financial system we will not be able to keep abreast with the developed nations. The results of economic reforms are now for everyone to see; Indian firms are becoming lean and cost effective now.

After the reforms in the industrial sector we should now complete the economic reforms in the financial sector also. Steps have already been taken like the establishment of private sector banks, private insurance companies, setting up of Pension Funds, relaxation in foreign currency regulations and so on. But we must speed up the reforms in this sector and get rid of Non Performing Assets at the earliest.

However, we have yet to start reforms in the agricultural sector. This is an area which has a very big potential to make us a developed country. Till date, we do not have any agricultural policy worth the name. Our productivity of agricultural crops per hectare is much lower than the productivity in other countries. Though we are number one in milk production today it is due to the fact that we have a large number of milch cattle and not because the productivity of our milch cattle is high as in other developed countries.

The market for agricultural products is still under-developed in terms of infrastructure and access to international markets. Countries like Holland and Germany grow more grains per hectare than India and get more milk from limited number of cattle stock. Therefore, to make India a developed country we will have to bring the agricultural sector on par with the agricultural sector in the developed countries.

Technologies play an important role in making a country developed or not so developed. Why America is on the top today is because of the fact that it has the best technologies in the world. Indian scientists have also done well to develop technologies which can put India at par with other developed countries.  In fact, many of our scientists and technologists working outside India have contributed to scientific research in those countries. If we can get our act together and consolidate our position in the technological sphere then we can claim to become a developed country.

There is also a need to change the mindsets of the people to bring them in tune with the one in developed countries. For instance, over a period time we should start reducing our dependence on concessional loans from various countries and instead start giving concessional loans to other developing countries.

When collaborating with foreign countries on research we should always insist of becoming an equal partner instead of a junior partner. For participation in international conferences we should stop taking any assistance from developed countries for our travel and stay by arguing that we belong to a Third World country. We should be able to pay from our own resources for participation of our academics in international conferences and symposia.

Finally, we also need to have a world-class infrastructure ready in the next 15 years. We need to set up a world-class communication system, transport system including good road and rail network.  All these are minimum requirements for the emergence of a developed nation, which India aspires to be. ---- INFA

(Copyright India News & Feature Alliance)

ECONOMIC HIGHLIGHTS

New Delhi, 9 January 2008

Living With Stronger Rupee

STOP GOVERNMENT SUCCOUR

By Dr. Vinod Mehta

(Former Director, Research ICSSR)

The rupee has been steadily appreciating vis-à-vis the US dollar since 2003.  But in the last about six months the appreciation has been more rapid. This is causing serious concern among the exporters especially those engaged in the export of garments, leather goods etc.  It is also affecting the software companies which are heavily dependent on the US market for their exports.

The rupee has risen by as much as Rs 5 to the US dollar (Rs 9 against the British pound and Re one against the Euro). Those in the foreign exchange business are of the view that the value of the rupee vis-à-vis the dollar will range between Rs 38- 41 during 2008 as against Rs 49 in 2002 and Rs 45 in 2003.

Besides, because of the strong rupee, India will not be able to meet its export target for the year 2007-08 and 2008-09 which is expected to fall by US $15- 20 billion during the current financial year. 

The industries that have been hit hard are textiles, leather, handicrafts and the service sectors.  Reportedly, nearly four million people have lost their jobs in the past two years alone because the foreign importers of Indian products have started buying similar products from other countries.

True, this is a part of the ongoing changing economic dynamics. However, the economic fundamentals are strong, foreign investors are quite upbeat about the Indian economy and are thus willing to pour in more money. Therefore, as of now one cannot foresee any possibility of the rupee losing its value.

One side effect of this is that the rupee is being increasingly accepted as a “hard currency” in many countries even though the Reserve Bank of India may not like it because it has not yet declared the rupee as fully convertible. But the peoples’ perceptions are entirely different; they are increasingly believing that the rupee could make a good asset! This is also one reason for the rupee becoming stronger.

The software companies are the hardest hit as their software exports are mainly for the US market. To quote: “Indian software firms get 60 per cent of their revenues from the US and 1 per cent appreciation of the rupee against the dollar can impact earnings before interest and tax margins by between 30 and 50 basis points. Irrespective of the fact whether the company is big or small, all of them have been hit. The margins may be impacted by as much as 4 per cent.”

Apart from the IT companies, small scale textile and leather units have also been hit.  It is no secret that foreign importers like Wal Mart and others source unbranded garments from countries like India, Pakistan, Bangladesh, Sri Lanka, Vietnam, Indonesia, the Philippines, China etc. With the Indian rupee becoming stronger the foreign importers have to pay more in dollars to the Indian exporters now for, say, a similar shirt that they were to import from Pakistan or Vietnam.

Therefore, the foreign importers of Indian garments have switched over to buying their requirements from other countries. Hence the fall in our exports and consequent closure of some units and job loss. This is also true of leather and other products.

But there is another set of people, the importers, who are happy about the strong rupee as it makes imports cheaper. For instance, India imports huge quantities of oil and with a stronger rupee it will pay less in dollar terms for its import. If the exporters are fretting about the declining export earnings because of the rupee’s appreciation, we should also be happy that the appreciating rupee also brings down our import bill of a number of goods and commodities like capital goods, oil, pulses, grain etc. 

No doubt, the appreciating rupee is only a temporary phenomenon which will stabilize at some level but we can use this opportunity to import capital goods to strengthen the capital base of our manufacturing sector. The time is also appropriate to import and build inventories of critical raw materials. We can also build our stocks of grain, pulses and edible oil to keep a check on inflation.

However, the concern of the small exporters is also genuine and needs to be attended to. Being labour intensive any loss of an export order will force them to close down leading to job losses. In the past, various Governments used to devalue currencies to protect their exports but devaluation as an instrument to check appreciation of any currency is now outdated. 

Moreover, because of the hue and cry raised by the exporters the Government came out with a Rs 1,400 crore relief package for exporters in July last year. It included interest subsidy to the tune of Rs 600 crore on bank loans for the small and medium sized exporters and Rs 800 crore on duty drawback to all the exporters on inputs used in the manufacture of export goods and other measures. But according to the exporters, the package is not sufficient notwithstanding the fact that it is expected to mitigate some of their problems. Happily for them some more relief packages are on the way.

The ideal thing would be for the Reserve Bank of India to manage the exchange rate fluctuations within a certain band to be determined by it along with managing the flow of foreign funds. But more important than this is that our business houses and industries must realize that as the economy gets stronger the rupee will also get stronger in relative terms.

Therefore, businesses which are heavily oriented towards the US markets must factor in the appreciating rupee in their calculations and devise strategies to check the erosion in their export earnings. Moreover, they also need to reduce their dependence on the US market and move towards the European market, Japan etc and start earning in Euro and Yen. 

The small and medium scale units engaged in the export of garments, leather goods, handicrafts etc must upgrade their technologies, plan newer products with newer designs to remain competitive. The other strategy could be to slowly switch over to branded products which will not then have to compete with unbranded products from countries like Indonesia, Vietnam or Bangladesh.

However, for a large number of people the exchange rate variations do not have much of a meaning unless some of the items of their daily consumption like pulses happen to be imported. The common man is concerned more with the domestic inflation which affects his living standards and not the appreciation or depreciation of rupee which is remotely connected to him. Fortunately, the domestic rate of inflation has come down which should make the consumer relatively happy.

In other words, there is no need to panic about the rupee’s appreciating value as it will not affect the common man to any significant extent. In economic terms, it means an automatic correction in the exchange rate and every player in the foreign exchange market adjusts its requirements accordingly.

The packages for exporters are unnecessary but in the given situation they are perhaps needed to meet the export target as well as save jobs. But this cannot be a long term measure. The business must learn to live with the strong rupee in this era of globalization, develop appropriate business strategies and stop looking for succor from the Government. ----INFA

(Copyright India News & Feature Alliance)

ECONOMIC HIGHLIGHTS

New Delhi, 2 January 2008

Economic Reforms’ Report Card

TOUCH FARM &  FINANCE SECTORS

By Dr Vinod Mehta

(Former Director, Research, ICSSR)

Thanks to economic reforms, India has been able to make a complete break with the Hindu rate of growth in just one-and-a-half decade. For almost four decades since Independence the country registered an annual growth rate of between three to five per cent; and in the past decade and a half it has been steadily rising and is currently hovering between nine and ten per cent. 

This does not mean that we have solved all our economic problems; we still have to go along way.  It only shows that if we persist with this growth rate we can now confidently tackle the problems of poverty and unemployment.

It is common knowledge that the need for economic reform was felt in the early eighties, but there was no political will to initiate the process of economic reforms in any meaningful manner.  It was initiated only after the nation was thrown into the worst-ever economic crises when it had to mortgage its gold to save itself from the humiliation of being labelled as a defaulter in relation to the repayment of its foreign debts.

The disintegration of the USSR, at that point of time, which underlined the deep economic malaise of a planned economy, also provided a kind of an ideological weapon to justify the reform process.

The rate of growth of the real Gross National Product (Gross National Product measured in terms of constant prices, which are currently 1980-81 prices in the case of India) had fallen from 5.3 per cent in 1990-91 to 0.6 per cent in 1991-92 and the real Net National Product (Gross National Product minus depreciation) fell from 5.2 per cent in 1990-91 to zero in 1991-92.

Therefore, it must be underlined that the process of economic reforms was initiated in India not as a well-thought out strategy but as a fire-fighting exercise to save the economy from the deepening economic crises.  But whatever the push factor the reforms had a salutary effect on the economy.

Compared to the year 1991-92, the economy today stands at a more sound footing and is receptive to more doses of economic reforms, provided we have the political will to further the process of economic reforms, 

The process of economic reforms, till date, has touched mainly the industrial sector of the economy and to some extent the service sector, but the agricultural sector and the financial sector have remained almost untouched by it. Some sub-sectors of the agricultural sector have benefitted indirectly via the reforms in the industrial sector, for instance, the food processing industry.

On the positive side, the following could be considered as the achievements of the past decade and a half of economic reforms: Firstly, the process of economic reforms has brought about a kind of change in the mindsets of a large number of people who have come to realize that a large number of Government controls in the economic sphere actually hampers growth, breeds corruption and that the Government is not always the best manager of resources. 

A very large amount of scarce resources locked up in inefficient and sometimes irrelevant public sector units are actually a drain on the economy.  This cannot go on for ever.  The acceptability of the need for economic reforms among the people today is much more than what it was a few years ago.

Secondly, the numerous industrial licensing controls have been done away with.  A few remaining industries which are still subject to licensing control account for only 15 per cent of the value added in the manufacturing. 

The number of industries reserved for the public sector has been reduced to six --- defence products, atomic energy, coal and lignite, mineral oils, railways and minerals specified in the schedule to Atomic Energy Order of 1953. However, in the case of defence products it has been thrown open to public-private partnership.

Thirdly, automatic approval of foreign investment up to 51 per cent for 35 priority industries which account for about 50 per cent value have been added in the manufacturing sector.  The Government has also allowed Indian companies not only to raise funds abroad but also buy out foreign firms. Something which was unthinkable five years ago.

Fourthly, the rupee has been made convertible on the current account and the exchange rates are now market determined. The apprehension that making the rupee convertible on current account would lead to an exodus of foreign exchange has been totally belied.  The rupee has in fact, become stronger which is giving sleepless nights to the exporters. 

While the market determined rate of exchange now reflects the real value of the rupee, it has at the same time, dealt a severe blow to the illegal foreign exchange business, if not totally eliminated it. The country is now slowly moving towards the full convertibility of the rupee.

Fifthly, the import duties have not only been streamlined but also reduced and brought in tune with the structure of import duties prevailing in other countries. The excise duty on almost all the items has been greatly reduced and streamlined.

Again, the direct and indirect tax rates have been greatly simplified and rationalized compared to the earlier years. With these reductions in tax rates, the tax collections have gone up substantiating the view that lower tax rates lead to more tax compliance.  Moreover, the fiscal deficit of the Government is now more manageable than what it was between 1990-91.

The process of economic reforms has, however, faltered on the following: Firstly, the process of economic reforms did not touch the agricultural sector to any significant extent. The subsidies under the various guises have continued to grow for the agricultural sector. 

Though the production of grain and other agricultural products have significantly increased (but gone down in the past two years), there has been very little impact of the final prices of agricultural products. No attempt has been made in the past 15 years to bring agricultural incomes in the tax net and thereby widen the tax base.

Secondly, the financial sector had been crying for reforms, but not much has been achieved.  Interest rates for the maturity period of two years and more have been deregulated, but the health of the some of the nationalized banks remains precarious.   

All the attempts to create mega banks to take on the foreign banks have come to a nought so far.  Again the SEBI has not been highly successful in taming the capital market --- price rigging and other malpractices in the bourses still persist.

Thirdly, the public sector disinvestment has been handled in a very bureaucratic and amateurish fashion. The privatization of the public sector units, where even a 5 per cent privatization could have brought in crores of rupees has brought only peanuts. 

The Government also failed to restructure its management and change its management style.  For months and years, the posts of chairmen and chief executive officers of various public sector units have been kept vacant.

Fourthly, the Government failed to come out with an exit policy for the industry. As a result, a lot of capital is locked up in the sick units. Again, in the absence of any meaningful exit policy a large number of foreign investors are fighting shy of committing their funds to India, as no foreign investor would like to be tied down to a sick unit.

Finally, though the fiscal deficit of the Government as a proportion of the GDP has come down, in absolute terms it is still very high. The Government has been unable to either curb its expenditure to any significant extent or streamline the structure of subsidies. 

Moreover, the success in controlling inflation is going to be short-lived as it is a result of the tight monetary policy and not a product of the demand and supply management. We need to produce more of everything to increase the supply of products, for instance, cement. 

To sum up, going by the above, the economic reforms can be said to have a salutary effect on the economy as a whole. Compared to the pre-reform period, almost all the economic indicators show improvement.  It has also set at rest some of the apprehensions, which were raised when these reforms were introduced. The question now is how we can deepen the process of economic reforms to cover the sectors which have remained untouched so far. ---- INFA

(Copyright India News & Feature Alliance)